Reference no: EM131791466
A luxury car import company, Collector’s Choice Inc. (CCI), has an old warehouse where it temporarily stores expensive sports cars and automotive parts that arrive from Europe. This summer, CCI has noticed that the termite infestation in the warehouse has escalated to a point where tenting cannot be postponed anymore. CCI’s pest control company’s contract specifies a to-do list of pre-tenting tasks, which include: The requirement of opening all windows is particularly worrisome to CCI because it means turning off the alarm system, leaving the warehouse vulnerable to burglary for 48 hours—the required amount of time for the poisonous gas to do its job. Therefore, Alex Ferrari, the warehouse manager, is thinking about hiring a security company to monitor the facility during that period. CCI’s property insurance deductible is $25,000, and Alex is assuming that if thieves are willing to enter a building full of poisonous gas to steal something, they would certainly take more than $25,000 worth of parts—or even an entire car! Alex gets in touch with ProGuard, a trustworthy local security company that charges $150 per hour to have a security guard stationed outside their warehouse. The city of Miami police records indicate that about 30% of businesses that left their facilities unattended during tenting reported stolen property in the past 3 years. Although Alex thinks ProGuard’s prices are reasonable, and having a guard outside the warehouse would certainly help, he is still not sure whether it is worth spending the extra money. After all, ProGuard’s contract does not guarantee the protection it provides is infallible. In fact, an analysis of the company’s records indicates that 3% of their clients were burglarized over the past 3 years. (Despite this figure, ProGuard is still the best security company in the area.
1. Create a decision tree analysis to help decide whether CCI should hire ProGuard’s services.
2. Come up with a simple rule of thumb that can be applied to decisions of this nature, given any deductible amount d, extra surveillance cost c, and burglary probabilities p1 (without surveillance) and p2 (with surveillance).
3. Does your decision based on the tree guarantee success? Why or why not?