Question

Zhu Manufacturing is considering the introduction of a family of new products.​ Long-term demand for the product group

is somewhat​ predictable, so the manufacturer must be concerned with the risk of choosing a process that is inappropriate. Faye Zhu is VP of operations. She can choose among batch manufacturing or custom​ manufacturing, or she can invest in group technology. Zhu​ won't be able to forecast demand accurately until after she makes the process choice. Demand will be classified into four​ compartments: poor,​ fair, good, and excellent. The table below indicates the payoffs​ (profits) associated with each​ process/demand combination, as well as the probabilities of each​ long-term demand​ level:

                                                                                                                                            

	Demand
	Poor	Fair	Good	Excellent
Probability	0.10	0.40	0.20	0.30
Batch	−$200,000	$1,000,000	$1,400,000	$1,400,000
Custom	$250,000	$250,000	$700,000	$800,000
Group technology	−$1,200,000	−$500,000	$22,000	$2,000,000

​a) The alternative that provides Zhu the greatest expected monetary value ​(EMV) is

▼

Group technology

Custom

Batch

.

The EMV for this decision is

​$

​(enter your answer as a whole​ number).

​b) The amount that Faye Zhu would be willing to pay for a forecast that would accurately determine the level of demand in the future​ =

$

​(enter your answer as a whole​ number).

Answer 1

Answer:

Decision alternatives	poor	fair	good	excelllent
Batch	-$200,000	$1,000,000	$1,400,000	$1,400,000
Custom	$250,000	$250,000	$700,000	$800,000
Group	-$1,200,000	-$500,000	$22,000	$2,000,000
Probability	0.1	0.4	0.2	0.3

EV will be given as= value of its cell *probability for alternative

EV table	poor	fair	good	excelllent	EMV= sum of EV
Batch	-$20,000	$400,000	$280,000	$420,000	$1,080,000
Custom	$25,000	$100,000	$140,000	$240,000	$505,000
Group	-$120,000	-$200,000	$4,400	$600,000	$284,400

EMV for the batch is highest

​a) The alternative that provides Zhu the greatest expected monetary value ​(EMV) is Batch. The EMV for this decision is $1,080,000

EVwoPI=EMV		$1,080,000
EVwPI= best possible outcome	0.1*250000 + 0.4*1000000 + 0.2*1400000 + 0.3*2000000	$1,305,000
EVPI= |EVwPI-EVwoPI|=		$225,000

​b) The amount that Faye Zhu would be willing to pay for a forecast that would accurately determine the level of demand in the future​ = $225,000

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