After your team has finished analysis and design of the system, you are charged
ID: 3816344 • Letter: A
Question
After your team has finished analysis and design of the system, you are charged to choose an implementation strategy. There are two options: in-house or outstanding. If you choose to outsource, the cost is $10M. If in-house option is taken, you need to hire a group of developers. If the development team you assemble is experienced, the cost will be cut by half, compared to the outsourcing option. The estimated contribution (benefit) of implementation phase to the project is $12M if outsourced; you expect to get an additional $3M benefit with the in-house option due to organizational learning. 1. Suppose you do not have any information regarding the development team's experience level, please indicate which option to take based on a. Maximin b. Maximax c. Laplace 2. Perform a breakeven analysis to identify the breakeven subjective probability. 3. If you could hire the developers on temporary basis, and had time to test them out by assigning them a simpler development task. If their success or failure on this task is a perfect indication of how well or badly they will do for the real project. What would be value of the test (the maximum you are willing to pay for the test project)? 4. If you can make your decision on implementation strategy after you observe the development team's experience level, what is the premium of this option to defer your decision?
Explanation / Answer
1. If i don't have any information regarding the development team's experience level. In decision theory, the optimistic decision making rule under conditions of uncertainty. It states that the decision maker should select the course of action whose best (maximum) gain is better than the best gain of all other courses of action possible in given circumstances. See i am choose in maximin.
2.Breakeven analysis:
Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs. Analyzing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs. A demand-side analysis would give a seller greater insight regarding selling capabilities.
Breaking down 'Break-Even Analysis':
Break-even analysis is useful in the determination of the level of production or in a targeted desired sales mix. The analysis is for management’s use only as the metric and calculations are often not required to be disclosed to external sources such as investors, regulators or financial institutions.
Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of sale.
Contribution Margin:
The concept of break-even analysis deals with the contribution margin of a product. The contribution margin is the excess between the selling price of the good and total variable costs.
Formulas for Break-Even Analysis:
The calculation of break-even analysis may be performed using two formulas.
First, the total fixed costs are divided the unit contribution margin.
Second, the break-even point in sales dollars is calculated by dividing total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price.
Breakeven Subjective Probability:
Subjective probability is a probability derived from an individual's personal judgment about whether a specific outcome is likely to occur. It contains no formal calculations and only reflects the subject's opinions and past experience. Subjective probabilities differ from person to person, and they contains a high degree of personal bias.
3. yes, i willing to pay for test project. why take the project is the Value of a framework for seeing projects as value creation processes, covering aspects such as the desired value and benefit, core purpose, outcomes and outputs, and the different phases of value creation from the strategic phase through to the value realization phase. If the success and failure on this task is a perfect indication of the real developer.
4. If i make the decision on implemention strategy after observing the development team's expreience level, i can choose the option to defer decision takes.