Construct a decision tree
Colonel Car Company: late design change
The Colonel Car Company has experienced a significant number of warranty claims associated with the driver’s side mirror in its luxury car. Almost 10% of the warranty claims in the first 6 months of operation relate to this mirror. The design engineers at Colonel have come up with a new design for the driver’s side mirrors. They believe the new design will not only reduce the warranty claims but also cut production costs. The decision is complicated by two factors. (1) Production of next year’s model is to begin in exactly 6 months, which means there is insufficient time to carry out a comprehensive production run test of the new design. (2) This model year has been classified as a quiet year to discourage design changes. Colonel executives have to decide whether or not to pursue the design change of the mirrors. The design change is expected to eliminate a major problem with a key component of the mirror, which accounted for 60% of the $250,000 in mirror warranty claims. The anticipated reduction in warranty costs amounts to $150,000. (Each 10% reduction in warranty claims saves $25,000.) In addition, this simpler design will reduce the variable cost of production with forecasted annual savings of $75,000. The new design will require new tooling that will cost a total of $35,000. There is a 20% chance that the new design will not perform as expected and will, in fact, make matters worse. If that happens, the company cannot simply revert back to the old design. Production will have to be interrupted while the old tooling is restored on an emergency basis. As a result, Colonel would incur a $250,000 cost in terms of lost production and emergency installation. If the company is to go ahead with the new design, it should move quickly and complete the changes within the next month. If the changeover is started but not completed by the 1 month deadline, there will be an added penalty of $100,000 for incorporating a new design after the deadline. There is a 70% chance that the design change can be implemented before the deadline.
a. Construct a decision tree