A manufacturing company must decide whether to manufacture a component part or p

Question

A manufacturing company must decide whether to manufacture a component part or purchase the component from a supplier. The resulting profit depends on the demand for the product. Demand can be Low, Medium or High. The company has estimated the payoff (in thousands of dollars) as follows. The payoffs for manufacturing will be -20, 40, and 100 under Low, Medium and High demands respectively. For purchasing, the pay offs will be 10, 45 and 80 for Low, Medium and High demands. Construct a payoff table. What is the optimum decision under minimax regret criterion?


Manufacture
Purchase
none of the above-

Explanation / Answer

State of nature

It is recommended to purchase the component.

If potential demand for the product is expected to report a favorable condition, then it is better to manufacture the component.

And if its is expected to report either an unfavorable condition, then it is better to purchase the component.

Low Demand Medium Demand High Demand Decision Alternative s1 s2 s3 Manufacturing, d1 -20 40 100 Purchase, d2 10 45 80

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