Assignment task: Imagine you are facing startup decisions in Biz Café with the details set forth below. (These are slightly different from your actual Biz Café choices. That's okay.) Build decision trees to show the management decision graphically and explain what decisions you would take based on your analysis.
You have two choices of coffee machines to lease, the 2-cup and the 4-cup machines. The 4-cup model produces twice as many cups at a time, and is also 30% faster than the 2-cup version.
You will lease the machine, at a cost of either:
- $1,200/month for the 2-cup machine; or
- $2,700/month for the 4-cup machine
1. You do not know yet whether the catchy advertising campaign you developed will generate awesome customer traffic or slow customer traffic. If the traffic is slow, either machine has enough capacity to serve every customer. If the traffic is awesome, the 4-cup machine will allow you to serve every customer. The 2-cup machine, however, does not have enough capacity to serve all of the potential customers who come to your door under the awesome traffic scenario. Many of them look at the long line and go across the street to your competitor instead. Your margin for every cup sold is $3.001.
- With slow traffic, either machine will allow you to sell 425 cups per day
- With awesome traffic, the 4-cup machine will allow you to sell 1,600 cups per day
- With awesome traffic, the 2-cup machine will allow you to sell only 600 cups per day
Assume that margin = revenue - COGS.
A) Draw a decision tree to visualize this problem.
B) Then evaluate your decision tree under the following different scenarios. That is, what is the expected value of selecting a 2-cup or 4-cup machine under each of the following scenarios:
- 25% probability of awesome traffic
- 50% probability of awesome traffic
- 75% probability of awesome traffic
C) Explain your findings in one-to-two sentences. What is your business insight? How would this analysis inform your decision?