Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN: 9781305627734
Author: Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher: Cengage Learning
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Chapter 15, Problem 9P
Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard. Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine, and the Riesling grapes would be used to produce a semidry Riesling wine. It takes approximately four years from the time of planting before new grapes can be harvested. This length of time creates a great deal of uncertainty concerning future demand and makes the decision about the type of grapes to plant difficult. Three possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and both Chardonnay and Riesling grapes. Seneca management decided that for planning purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine, it was necessary to assess four probabilities. With the help of some forecasts in industry publications, management made the following
Revenue projections show an annual contribution to profit of $20,000 if Seneca Hill plants only Chardonnay grapes and demand is weak for Chardonnay wine, and $70,000 if Seneca plants only Chardonnay grapes and demand is strong for Chardonnay wine. If Seneca plants only Riesling grapes, the annual profit projection is $25,000 if demand is weak for Riesling grapes and $45,000 if demand is strong for Riesling grapes. If Seneca plants both types of grapes, the annual profit projections are shown in the following table:
- a. What is the decision to be made, what is the chance
event , and what is the consequence? Identify the alternatives for the decisions and the possible outcomes for the chance events. - b. Develop a decision tree.
- c. Use the
expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit. - d. Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose that the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50.
- e. Other members of the management team expect the Chardonnay market to become saturated at some point in the future, causing a fall in prices. Suppose that the annual profit projections fall to $50,000 when demand for Chardonnay is strong and only Chardonnay grapes are planted. Using the original probability assessments, determine how this change would affect the optimal decision.
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Chapter 15 Solutions
Essentials of Business Analytics (MindTap Course List)
Ch. 15 - Prob. 1PCh. 15 - Southland Corporation’s decision to produce a new...Ch. 15 - Amy Lloyd is interested in leasing a new Honda and...Ch. 15 - Investment advisors estimated the stock market...Ch. 15 - Hudson Corporation is considering three options...Ch. 15 - Prob. 6PCh. 15 - Myrtle Air Express decided to offer direct service...Ch. 15 - Video Tech is considering marketing one of two new...Ch. 15 - Seneca Hill Winery recently purchased land for the...Ch. 15 - Hemmingway, Inc. is considering a $5 million...
Ch. 15 - The following profit payoff table was presented in...Ch. 15 - Suppose that you are given a decision situation...Ch. 15 - A firm has three investment alternatives. Payoffs...Ch. 15 - Alexander Industries is considering purchasing an...Ch. 15 - In a certain state lottery, a lottery ticket costs...Ch. 15 - Three decision makers have assessed utilities for...Ch. 15 - In Problem 22, if P(s1) = 0.25, P(s2) = 0.50, and...Ch. 15 - Translate the following monetary payoffs into...Ch. 15 - Consider a decision maker who is comfortable with...
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