A glass factory specializing in crystal is experiencing a substantial backlog, a

Question

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: a, b, or c: a.      Arrange for subcontracting $4,457 ( to set up new contract) b.      Construct new facilities $10,015 (additional operating costs per year) c.      Do nothing (no change) There are three demand possibilities: probability Low 0.166 Medium 0.477 High 0.357 The payoffs Gross Income Probabilities Courses of Action low demand Med demand High Demand a $13,862.11 $46,172.64 $80,211.76 b $23,397.99 $27,506.56 $175,535.93 c $14,872.94 $48,945.20 $106,272.19 Correctly complete the decision tree using excel and do all calculations to provide the best EMV. A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: a, b, or c: a.      Arrange for subcontracting $4,457 ( to set up new contract) b.      Construct new facilities $10,015 (additional operating costs per year) c.      Do nothing (no change) There are three demand possibilities: probability Low 0.166 Medium 0.477 High 0.357 The payoffs Gross Income Probabilities Courses of Action low demand Med demand High Demand a $13,862.11 $46,172.64 $80,211.76 b $23,397.99 $27,506.56 $175,535.93 c $14,872.94 $48,945.20 $106,272.19 Correctly complete the decision tree using excel and do all calculations to provide the best EMV.

Explanation / Answer

Ans:

EMV for option a=13862.11*0.166+46172.64*0.477+80211.76*0.357-4457=48504.06

EMV for option b=23397.99*0.166+27506.56*0.477+175535.93*0.357-10015=69656.02

EMV for option c=14872.94*0.166+0.477*48945.2+106272.19*0.357=63754.94

Maximum or best EMV is for option b.

Courses of Action low demand Med demand High Demand EMV a 13862.11 46172.64 80211.76 48504.06 b 23397.99 27506.56 175535.93 69656.02 c 14872.94 48945.20 106272.19 63754.94 Probability 0.166 0.477 0.357

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