Question

# 1.A product is currently made in a process-focused shop, where fixed costs are \$8,000 per year...

1.A product is currently made in a process-focused shop, where fixed costs are \$8,000 per year and variable cost is \$40 per unit. The firm currently sells 200 units of the product at \$200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = \$24,000 per year and variable costs = \$10 per unit. If a price of \$80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain.

Question 2

The efficiency of a factory is 75% and its utilization 50%. If effective capacity is 1000 find design capacity

Question 3

A plant manager wants to know how much he should be willing to pay for perfect market research. Currently there are two states of nature facing his decision to expand or do nothing. Under favorable market conditions the manager would make \$100,000 for the large plant and \$5,000 for the small plant. Under unfavorable market conditions the large plant would lose \$50,000 and the small plant would make \$0. If the two states of nature are equally likely, how much should he pay for perfect information?

Question 4

XYZ company has designed a new lottery scratch-off game. The player is instructed to scratch off one spot: A, B, or C. A can reveal "loser," "win \$1," or "win \$50." B can reveal "loser" or "take a second chance." C can reveal "loser," or "win \$500." On the second chance, the player is instructed to scratch off D or E. D can reveal "loser" or "win \$1." E can reveal "loser" or "win \$10." The probabilities at A are 0.9, 0.09, and 0.01 respectively. The probabilities at B are 0.8 and 0.2. The probabilities at C are 0.999 and 0.001. The probabilities at D are 0.5 and 0.5. The probabilities at E are 0.95 and 0.05. Calculate the expected value of the game

1. For current process

Fixed cost = \$8000 per year

Variable cost = \$40 per unit

Selling price = \$200 per unit

Quantity sold = 200

Profit = Revenue – total cost

Profit = selling price * quantity sold – (annual fixed cost + variable cost * quantity sold)

Profit   = 200 * 200 – (8000 + 400 *200)

Profit = 24000

Profit for current process is = \$24,000

New process

Annual fixed costs = \$24000 per year

Variable cost = \$10 per unit

Quantity sold = 400

Selling Price = \$80

Profit = Revenue –total cost

Profit = selling price per unit * quantity sold – (annual fixed costs + variable cost * quantity sold)

Profit = 80 * 400 – (24000 +10 *400)

Profit = \$4000

Expected profit with new process = \$4000

Profit with the current process is \$24000 is more than the new process that is \$4000 so manager will not change the process.

2. Solution efficiency = output/ effective capacity

0.75           = output/1000

Output       =750

Utilization= Output/design capacity

0.50           = 750/design capacity

Design capacity =750/0.5

Design capacity = 1500

3. Expected value of perfect information for smith =

= 100,000*0.5 + 0*0.5 = 50,000

= 25,000

EVPI = 25,000

. 4.

Alt 1: Spot A

Expected Value, EVA = (0.9 x 0) + (0.09 x 1) + (0.01 x 50) = \$0.59

Alt 2: Spot B

Expected Value, EVB = (0.8 x 0) + [0.2 x (0.5 x 0) + (0.5 x 1) + (0.95 x 0) + (0.05 x 10)] = \$0.2

Alt 3: Spot C

Expected Value, EVC = (0.999 x 0) + (0.001 x 500) = \$ 0.5

The Expected Value is highest for Alt 1 when Spot A is revealed.

The Expected Value of game is EVA = \$0.59

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