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Warm Greetings Sir.
There’s a question in the Exam Kit of Kaplan titled “RY Decision Tree”.
The question talks about a company deciding as to what should be the price it should charge for route from London to Paris per customer
We have been provided with S/Price of $80, $ 90 and $100 respective.
And further the question states that the airport charges are incurred for each customer and these are expected to be either $5 or $6 per customer depending on the negotiations with the airport involved.
And there is a fixed cost of a flight from London to Paris i.e. of $4422.I have doubt on a specific point, the answer in kit has shown the possible values in the decision tree as contributions rather than profit figures.
Why is it so?
Is Fixed cost not relevant in case of a decision tree?Given that the total fixed cost will be the same in every case, whichever decision gives the maximum total contribution will automatically give the maximum fixed cost as well.
Sir do you mean we could have even calculated the same using Profit Figure rather than contribution i.e by incorporating fixed cost?
Yes you could, but it would just give more places where you could make a calculation mistake 🙂
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