AFC is about to launch its new Wings N Things fast food nati

AFC is about to launch its new Wings ‘N Things fast food nationally. The research department is convinced that Wings ‘N Things will be a great success and wants to introduce it immediately in all AFC outlets without advertising. The marketing department sees “things” differently and wants to unleash an intensive advertising campaign. The advertising campaign will cost $100,000 and if successful will produce $600,000 revenue. If the campaign is unsuccessful (there is a 20% chance that it won’t be successful), the revenue is estimated at only $200,000. If no advertising is used, the revenue is estimated at $400,000 with probability .7 if customers are receptive and $200,000 at probability .3 if they are not.

a. Draw a decision tree diagram containing the probabilities and the payoffs.

b. What course of action should AFC follow in launching the new product (advertise or don’t advertise)?

c. What is the expected revenue based on this decision?

Solution