Question

MacDonald​ Products, Inc., of​ Clarkson, New​ York, has the option of

​(a) proceeding immediately with production of a new​ top-of-the-line stereo TV that has just completed prototype testing or

​(b) having the value analysis team complete a study.

If Ed​ Lusk, VP for​ operations, proceeds with the existing prototype​ (option a), the firm can expect sales to be

95 comma 00095,000

units at

​$630630

​each, with a probability of

0.490.49

and a

0.510.51

probability of

70 comma 00070,000

at

​$630630.

​If, however, he uses the value analysis team​ (option b), the firm expects sales of

80 comma 00080,000

units at

​$730730​,

with a probability of

0.630.63

and a

0.370.37

probability of

60 comma 00060,000

units at

​$730730.

Value​ engineering, at a cost of

​$115 comma 000115,000​,

is only used in option b. Which option has the highest expected monetary value​ (EMV)?

The EMV for option a is

​$nothing

and the EMV for option b is

​$nothing.

​Therefore, option

▼

b

a

has the highest expected monetary value.

​(Enter

your responses as

integers​.)

Answer 1

EMV = Sum of ( Probability of sales* Revenue)

EMV Option A = (95000*630*0.49)+ (70000*630*0.51) = $51817500

EMV Option B =(80000*730*0.63)+(0.37*60000*730) - 115000 = 52998000-115000 = $52883000

EMV of Option B is better.