Huntz Food Products is attempting to decide if it should introduce a new line of salad dressings called Special Choices. The company can test market the salad dressings in selected geographic areas or bypass the test market and introduce the product nationally. The cost of the test market is $150,000. If the company conducts the test market, it must wait to see the results before deciding whether or not to introduce the salad dressings nationally. The probability of a positive test market result is estimated to be 0.6. Alternatively, the company cannot conduct the test market and make the decision to introduce the dressings or not. If the salad dressings are introduced nationally and are a success, the company estimates it will realize an annual profit of $1,600,000, while if the dressings fail the company will incur a loss of $700,000. The company believes the probability of success for the salad dressings is 0.50 if it is introduced without the test market. If the company does conduct the test market and it is positive, the probability of successfully introducing the salad dressings increases to 0.8. If the test market is negative and the company introduces the salad dressings anyway, the probability of success drops to 0.30.
a. Create a Decision Tree and identify the strategy you would recommend.
b. The company is unsure about the cost of the test market. Analyze the sensitivity of the Decision Tree for a range of costs from $50,000 to $300,000. Create a Sensitivity Report in 11 intervals that shows both the expected payoff and the decision for each interval (label this report as ‘3b’). What does this report tells us?
