Case Background
George Lassiter makes t-shirts for special events such as concerts. The upcoming concert presents another opportunity for George to make and sell t-shirts; however the question is how many t-shirts to produce. There are two fundamental case questions that must be answered:
1. What are the possible financial outcomes if Lassiter orders 5,000 T-shirts? 7,500? 10,000?
As shown in the Exhibit, a rather simple but detailed decision tree has been made which represents the various options for George. The financial outcomes for the three different amounts of t-shirts that he can provide are presented in tabular form, in the Appendix. Table 1 shows profit outcomes for ordering 5000 shirts, Table 2 shows profit outcomes for …show more content…

Comparing these results with the results of the 7500 shirts order, we find that the probability of making $27000 or less is also 42%. Similarly, the probability of making a loss of $333 or less is 6%, the same probability for making a loss in the 10,000 shirts order. While the probability of 100% for a maximum profit of $37250 is significantly lower than that for the 10,000 shirts, we have to take into account the risk involved with both the decisions. The amount of loss for 7500 shirts is much lower ($3125 to be exact) despite having the same probability of 6%. This analysis leads us to conclude with confidence that the option of producing 10,000 shirts involves a much higher degree of risk than George would like. We would now need to compare the profitability and probabilities for the 5000 shirts option.

For the option of producing 5000 shirts, the risk analysis indicates clearly that there is no loss with this option. There is a 6% probability of making a profit of $3416 or less and a 0% probability of making a loss. This trumps the other two options as this is the only option for George which does not involve any losses. The probability of making a $23,916 profit or less with 5000 shirts is 42%. With the same probability in the 7500 shirts option, the 5000 shirt option fares better once again as it makes a slightly higher profit. The biggest setback for George in the 5000 shirt option is regarding the maximum profit that he can earn.