Greenwood Joinery may bid for a contract to supply 1000 doors for a new hotel and is considering two possible bids either £90 per door or £120 per door. The company believes
that a bid of £90 per door has a 90% chance of winning the contract while a bid of £120 has a
30% chance of winning the contract. The contract includes a penalty cost of £15,000 for late
completion of the order. With existing operations, the production cost would be £70 per door
and there would be a 60% chance of the order being late. Hiring extra staff would increase
production cost to £80 per door, but would ensure that the order is completed on time. The
cost of preparing and submitting a bid is £500.
b) Draw a decision tree that models this problem and use it to determine the policy that the
company should adopt to maximise its expected profit. I
(40 marks)
c) Suppose the penalty cost for late completion of the order is unknown. Determine the
range of values for this penalty cost for which the policy determined in (b) remains
optimal.
(20 marks)