Business decision making

Question 1

Tolkien Transport is currently based in Leeds but has plans to expand its operations by setting up another depot in the south of England. The management team has identified four possible locations for the depot and these are listed in the decision matrix below. As a first step they have decided to use a multi-criteria analysis (MCA) to rank the options. After much discussion, the team have decided on three key criteria (Cost, Accessibility and Environmental Impact) against which to judge the options and have agreed on the ratings shown in the matrix, below (running from 4 for the best to 1 for worst under each criterion). The criteria have been weighted as follows: Cost (0.45), Accessibility (0.35) and Environmental Impact (0.2).

Required:

• Given the information above, which location would you advise Tolkien Transport to choose? Show your workings.

• Explain to Tolkien Transport the limitations of a multi-criteria analysis for a decision problem of this kind.

Question 2

Tolkien’s marketing manager has been asked to develop a new promotional strategy for the company, which has been facing stiff competition from some new transport companies. After much research she has narrowed down the choice to three strategies and has constructed the decision tree shown below – which includes the payoffs and probabilities she has managed to estimate – but it is incomplete. She has identified three alternative promotional strategies (and their upfront cost): customer referral programme (£35,000); causes and charity (£30,000); branded gifts (£50,000). The impact on turnover in each case depends on the ‘reach’ of the promotional campaigns which could be high, medium or low. The payoffs represent the increase in annual sales turnover in £000s over a one-year period (excluding up-front costs).

Required:

• Complete the decision tree by providing the value of all missing elements (shown as A, B, C, D, all marked with a *).
• Use the decision tree to advise the marketing manager on the best option to choose, assuming the company wishes to maximize expected annual sales turnover, net of upfront costs.

Question 3

Tolkien Transport has a small facility adjacent to its Leeds depot which it uses to manufacture tarpaulins for its lorries. The facility currently produces 3000 tarpaulins a year. The company’s Finance Manager has estimated the cost per tarpaulin at this level of output to be:

An outside supplier has offered to supply all the tarpaulins required by Tolkien for £145 each. If Tolkien decided not to make the tarpaulins, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided.

Required:

• Calculate how much higher or lower Tolkien’s net operating income would be if it purchased the tarpaulins from the outside supplier, showing all calculations. Would you advise Tolkien to accept the offer?
• Clearly explain to Tolkien’s Finance Manager how opportunity cost might affect the make or buy decision. Illustrate with a numerical example.