U Toys has developed a new product―the (PHAF). They are now deciding how to market the doll.One option is to immediately ramp up production and launch an ad campaign throughout the state. This option would cost $60,000. Based on past experience, new action figures either take off and do well, or fail miserably. Hence, they predict one of two possible outcomes— total sales of 20,000 or total sales of only 4000 units. The net profit per unit sold is $5.Another option is to first test market the product in Yakima before deciding whether to sell statewide. The test market would require less capital for the production run, and a much smaller ad campaign. Again, they predict one of two possible outcomes for Yakima. The product will either do well (sell 500 units) or do poorly (sell 100 units). The cost for this option is estimated to be $1000. The net profit per unit sold is $5 for the test market as well. Once the test market is complete, University Toys would then use these results to help decide whether to market the toy statewide.  University Toys has test marketed similar toys in the Yakima market 50 times in the past, with the results  shown in the table below. Since University Toys thinks PHAF is similar to these other toys, they plan to  estimate the probabilities of the various outcomes based on these historical results. For example, ignoring  the test-market results, 30 out of 50 of the previous toys sold well statewide, so without a test market  they estimate a 60% probability for PHAF to sell well statewide. If a test market is done, these same data  should be used to estimate the probabilities of the various outcomes.   Sells Well statewide sells poorly statewide Tests well in Yakima 20 5 Tests poorly in yakima 10 15 There is a complication with the Yakima test market option, however. A rival toy manufacturer is rumored  to be considering the development of a Dean Hodge Action Figure (DHAF). After doing the test market in  Yakima, if University Toys decides to go ahead and ramp up production and market throughout the state,  the cost of doing so would still be $60,000. However, the sales prospects depend upon whether DHAF has  been introduced into the market or not. If DHAF has not entered the market, then the sales prospects will  be the same as before (i.e., 20,000 units if PHAF does well, or 4000 units if PHAF does poorly, on top of  any units sold in the test market). However, if DHAF has entered the market, the increased competition  will diminish sales of PHAF. In particular, they expect to sell 10,000 if PHAF does well, and 2000 units if it  does poorly, on top of any units sold in the test market. Note that the probability of PHAF doing well or  doing poorly is not affected by DHAF, just the final sales totals of each possibility. If a test market is done,  there is a 20% chance that DHAF will enter during the test market (before it completes). On the other  hand, if UW Toys markets PHAF immediately, they are guaranteed to beat DHAF to market, thus making  DHAF a non-factor. a. Use TreePlan to develop a decision tree to help UW Toys decide the best course of action and the  expected payoff. In words below the tree, state the best course of action assuming your goal is to  maximize the expected payoff. b. Now suppose UW Toys is uncertain of the probability that DHAF will enter the market before the end  of the test market in Yakima would be completed (if it were done). How does the expected payoff  vary as the probability that the DHAF would enter the market changes? On the same worksheet used  for part a, generate a data table that shows how the expected payoff and the initial decision changes  as the probability that DHAF enters varies from 0% to 100% (at 10% increments). At what probability  does the decision change?

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U Toys has developed a new product―the (PHAF). They are now deciding how to market the doll.One option is to immediately ramp up production and launch an ad campaign throughout the state. This option would cost $60,000. Based on past experience, new action figures either take off and do well, or fail miserably. Hence, they predict one of two possible outcomes— total sales of 20,000 or total sales of only 4000 units. The net profit per unit sold is $5.Another option is to first test market the product in Yakima before deciding whether to sell statewide. The test market would require less capital for the production run, and a much smaller ad campaign. Again, they predict one of two possible outcomes for Yakima. The product will either do well (sell 500 units) or do poorly (sell 100 units). The cost for this option is estimated to be $1000. The net profit per unit sold is $5 for the test market as well. Once the test market is complete, University Toys would then use these results to help decide whether to market the toy statewide. 
University Toys has test marketed similar toys in the Yakima market 50 times in the past, with the results 
shown in the table below. Since University Toys thinks PHAF is similar to these other toys, they plan to 
estimate the probabilities of the various outcomes based on these historical results. For example, ignoring 
the test-market results, 30 out of 50 of the previous toys sold well statewide, so without a test market 
they estimate a 60% probability for PHAF to sell well statewide. If a test market is done, these same data 
should be used to estimate the probabilities of the various outcomes.

  Sells Well statewide sells poorly statewide
Tests well in Yakima 20 5
Tests poorly in yakima 10 15


There is a complication with the Yakima test market option, however. A rival toy manufacturer is rumored 
to be considering the development of a Dean Hodge Action Figure (DHAF). After doing the test market in 
Yakima, if University Toys decides to go ahead and ramp up production and market throughout the state, 
the cost of doing so would still be $60,000. However, the sales prospects depend upon whether DHAF has 
been introduced into the market or not. If DHAF has not entered the market, then the sales prospects will 
be the same as before (i.e., 20,000 units if PHAF does well, or 4000 units if PHAF does poorly, on top of 
any units sold in the test market). However, if DHAF has entered the market, the increased competition 
will diminish sales of PHAF. In particular, they expect to sell 10,000 if PHAF does well, and 2000 units if it 
does poorly, on top of any units sold in the test market. Note that the probability of PHAF doing well or 
doing poorly is not affected by DHAF, just the final sales totals of each possibility. If a test market is done, 
there is a 20% chance that DHAF will enter during the test market (before it completes). On the other 
hand, if UW Toys markets PHAF immediately, they are guaranteed to beat DHAF to market, thus making 
DHAF a non-factor.
a. Use TreePlan to develop a decision tree to help UW Toys decide the best course of action and the 
expected payoff. In words below the tree, state the best course of action assuming your goal is to 
maximize the expected payoff.
b. Now suppose UW Toys is uncertain of the probability that DHAF will enter the market before the end 
of the test market in Yakima would be completed (if it were done). How does the expected payoff 
vary as the probability that the DHAF would enter the market changes? On the same worksheet used 
for part a, generate a data table that shows how the expected payoff and the initial decision changes 
as the probability that DHAF enters varies from 0% to 100% (at 10% increments). At what probability 
does the decision change?

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