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Qnt. 5040 Mini Report #2 Winter Term 2015
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Mini Report #2
Qnt. 5040 Winter Term 2015
Dr. Phillip S. Rokicki
Maximum number of points: 5 points
Decision Tree Analysis Festus Temperature Controls Case Study
NOTE: Only work done using Palisades PrecisionTree Software will be acceptable
Decision trees are superb tools for helping you to select between several courses of action. They
provide a highly effective structure in which you can lay out options and investigate the possible
outcomes of choosing those options. They also help you to form a balanced picture of the risks
and rewards associated with each possible course of action.
Key Points for Decision Trees
Decision trees provide an effective method of decision making because they:
1. Visibly lay out the problem so that all options can be tested;
2. Allow you to fully analyze possible consequences of making any given decision;
3. Provide a framework to quantify the values of outcomes and the probabilities of
achieving them; and,
4. Help you to make the best decisions on the basis of current information and best guesses.
As with all decision making methods, decision tree analysis should be used in conjunction with
common sense decision trees are just one important part of your decision making tool kit.
In this case study you will be using the information from below to create a PrecisionTree 1 for
Festus Temperature Controls Case Study. They need your help to first display the various
options open to them, then to analyze these options and to recommend a course of action. Read
the information carefully. It contains all of the information that you need to create your
PrecisionTree. The analysis is, of course, up to you. But do it completely.
Remember the output for this case study is to be in the form of a mini report similar to the other
reports that you have produced. Thus you will have an executive summary (200 words), the
body of the report with the PrecisionTree (copied from Excel), and the concluding statement (75
words) and citation section. The mini report should be between 5 to 9 pages in length.

1 Notice that PrecisionTree is one word with the p and the t capitalized.

Copyright R&A 2015

Page 1

Festus Temperature Controls Case Study
Randy Cliff, manager of Festus (Missouri) Temperature Controls Company has a good problem.
His company has been experiencing unexpected growth since 2009 and now has some extra plant
capacity that he needs to use. The company is considering a short manufacturing run for either
two types of new products, a temperature sensor or a pressure sensor. Randys chief sales
manager has assured him that either product will be successful in the marketplace, however
Randy is not sure that his team will be able to develop them successfully in the short time
The sales manager believes that there is a probability of 65% that the potential revenue of $1.5
million from selling the temperature sensor, and probability of 35% that the potential revenue of
$750,000 from selling the pressure sensor. Both of these amounts are net of the production costs,
but do not include the development costs for either.
If the development is unsuccessful for a product, then there will be no sales, and the development
cost will be totally lost. Randy estimates that the development cost for the temperature sensor
would be $155,000 and for the pressure sensor the cost will be $26,000.
Randy has asked you to help his senior management team figure out the pros and cons of these
several options to their product line. To do this you will create a PrecisionTree, analyze the tree
using the maximax, maximin, and the other decision-making techniques presented to you during
week nine chat, and help the company decide which way to proceed based on the expected
monetary value and good old common sense.
Calculating The Value of Uncertain Outcome Nodes
Where you are calculating the value of uncertain outcomes (probability nodes on the diagram),
do this by multiplying the value of the outcomes by their probability. The total for that node of
the tree is the total of these values.
For instance, if the probability of an outcome (positive or negative) is 35% and the value for that
node is $200,000 then you multiply $200,000 times .35 and the value of this node is: $70,000.
So this is your last case study. One that I hope will provide you with a real world experience in

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Qnt. 5040 Mini Report #2 Winter Term 2015
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  • Submitted On 18 Jun, 2015 06:52:33
Solution posted by
Executive Summary The decision tree analysis is an innovative statistical tool that can be applied for decision making process by testing all the alternatives. It is applied here in the case of Festus Temperature control and three different situations - normal, best and worst and it is found that project of launching the new products are financially feasible. Sensitivity analysis confirms that the initial investment doesn’t significantly affect the outcome of project. Therefore project is feasible viable and one should proceed with it. However, it is not possible to consider all the underlying factors but the best possible factors’ consideration gives more accurate expected values and which in turn lets to make good decision. Introduction As a part of expansion of product line and growth of business, company is planning to produce two different kinds of products for short run - Temperature sensor and Pressure sensor. However company has a long time experience of producing the temperature control products but at this time this new temperature sensor is embedded with new technology that has not taken a significant place in the real practice. Second, at this time company is also planning to introduce the pressure sensor. Thi...
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