Probability Analysis Of Harley Davidson General Manager

Probability Analysisa General Manger Of Harley Davidson Has To Decide

Probability Analysis A General Manger of Harley-Davidson has to decide on the size of a new facility. The GM has narrowed the choices to two: large facility or small facility. The company has collected information on the payoffs. It now has to decide which option is the best using probability analysis, the decision tree model, and expected monetary value. Options: Facility Demand Options Probability Actions Expected Payoffs Large Low Demand 0.4 Do Nothing ($10) Low Demand 0.4 Reduce Prices $50 High Demand 0.6 $70 Small Low Demand 0.4 $40 High Demand 0.6 Do Nothing $40 High Demand 0.6 Overtime $50 High Demand 0.6 Expand $55 Determination of chance probability and respective payoffs: Build Small: Low Demand 0.4($40)=$16 High Demand 0.6($55)=$33 Build Large: Low Demand 0.4($50)=$20 High Demand 0.6($70)=$42 Determination of Expected Value of each alternative Build Small: $16+$33=$49 Build Large: $20+$42=$62 Click here for the Statistical Terms review sheet. Submit your conclusion in a Word document to the M4: Assignment 2 Dropbox by Wednesday, August 13, 2014 .

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The decision-making process for Harley-Davidson's new facility involves analyzing probabilistic outcomes to determine the most financially advantageous option. The company faces a crucial choice: whether to build a large or a small facility, considering uncertain demand scenarios and associated payoffs. To make an informed decision, the management employs probability analysis, decision trees, and expected monetary value (EMV) calculations. These tools provide a systematic approach to evaluate potential outcomes based on their likelihood and profitability.

Initially, the company gathers data on demand probabilities and payoffs for various actions. For the large facility, there are two demand scenarios: low demand with a probability of 0.4 and high demand with a probability of 0.6. Corresponding payoffs depend on selected actions, such as doing nothing, reducing prices, overtime work, or expanding the capacity. Similarly, for the small facility, the demand probabilities are identical, but the payoffs differ based on the action taken. By calculating expected payoffs for each scenario, Harley-Davidson can compare the overall value of each facility option.

The expected monetary value (EMV) for each alternative is computed by multiplying each payoff by its probability and summing these results. For the small facility, the EMV calculations are as follows: low demand, 0.4($40) = $16; high demand, 0.6($55) = $33; total EMV = $16 + $33 = $49. For the large facility, the calculations are: low demand, 0.4($50) = $20; high demand, 0.6($70) = $42; total EMV = $20 + $42 = $62. These EMV analyses suggest that building a large facility has a higher expected payoff compared to the small facility.

The decision tree model visualizes the sequence of events, probabilities, and payoffs, aiding the management in understanding the potential outcomes in a structured manner. The diagram clearly shows the branches representing different demand levels and corresponding actions, each weighted by their probabilities. This visual approach facilitates a comprehensive comparison of options, supporting the analysis of risk and reward.

In conclusion, based on the probabilistic analysis and EMV calculations, Harley-Davidson should consider building a large facility, as it offers a higher expected monetary value ($62) compared to the small facility ($49). The decision aligns with maximizing expected profitability, given the current demand probability estimates. However, management should also consider other factors, such as capacity constraints, strategic goals, and market conditions, which might influence the final decision beyond the quantitative analysis. The utilization of decision trees and probability analysis thus provides a rational framework for making informed capital investment decisions in uncertain environments.

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