the lower alternative of Buy Now with a result of $58,400. The tree can now be collapsed to the decision shown in Figure 3-11.

We choose between an average profit of $57,600 for Buy Later or $58,400 for Buy Now. Based on this, we would like to get as much profit as possible, so we would choose to buy now (see Figure 3-12).

We can now expand the concept of expected value to a more generalized concept of a decision theory. In that theory, we can evaluate the decision in terms of a state table or sometimes called a payoff table. The state table shows the various states of the world of the decision for all of the various alternatives. For example, assume that you only have one uncertainty as shown in Figure 3-13.

- Pat's Decision


Decision 58400 Buy Now!_

Figure 3-12 Final results.

Target cost analysis

The project team should be equipped to perform target cost analysis of the product. This costing assessment addresses the overall, life cycle cost of designing and product and producing and marketing it, as shown in Table 3-34:

In Table 3.34, column 1 is the total cost of product design and development, e.g., the prototype cost.

Column 2 is what it will cost to produce one unit of the product. Column 3 is the total amount of product to be produced in the production plan. Column 4 is the total volume production cost. Column 5 is the cost of marketing the product, and column 5 is the final cost of getting the product to market, e.g., the finals cost of sales. Column 7 is the forecasted sales of the product, column 8 is the product unit price, and column 9 is the final revenue.

Target cost (or design cost) is the maximum cost of producing one unit of the project deliverable, given the target for revenues (plus profit margin) for the

TABLE 3-34 Target Cost: Project Life Cycle (2 Years)
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