Question

Edwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, whereas the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years.

	Demand Volume
Decision	Low	Medium	High
Basic model	$60,000	$110,000	$160,000
Advanced model	$55,000	$125,000	$165,000

Fill in the table below for maximum and minimum profit payoffs under each model. Round your answers to the nearest dollar.

Decision alternative	Maximum	Minimum
Basic model	$	$
Advanced model	$	$

Calculate the amounts foregone by not adopting the optimal course of action for each possible demand level. Determine the maximum opportunity cost for each model. Fill in the table below. If your answer is zero, enter "0". Round your answers to the nearest dollar.

Opportunity Loss Matrix		Future events
Decision alternative	Low	Medium	High	Maximum
Basic model	$	$	$	$
Advanced model	$	$	$	$

Given the uncertainty associated with the demand volume, and no other information to work with, what decision would you make?

The aggressive strategy (maximax) is to choose the -Select-advanced modelbasic modelItem 13 .

The conservative strategy (maximin) is to choose the -Select-advanced modelbasic modelItem 14 .

The opportunity loss strategy is to choose the -Select-advanced modelbasic modelItem 15 .

Answer 1

Decision alternative	Maximum	Minimum
Basic model	160000	60000
Advanced model	165000	55000

Opportunity Loss Matrix		Future events
Decision alternative	Low	Medium	High	Maximum
Basic model	0	15000	0	15000
Advanced model	5000	0	5000	5000

The aggressive strategy (maximax) is to choose Advanced model (Maximum of the maximum payoffs is selected)

The conservative strategy (maximin) is to choose Basic model (Maximum of the minimum payoffs is selected)

The opportunity loss strategy is to choose the Advanced model (Minimum of the maximum opportunity loss is selected)
Opportunity loss = best payoff-payoff generated