An operations manager is deciding on the level of automation for a new process.
ID: 350346 • Letter: A
Question
An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equiptment, purchase price, installation, and initial spare parts. The variable costs per unit for each level of automation are primarily labor related. The selling price of each unit has increased to $100. Based on past sales data, marketing has projected the following probabilities of future demand
1) What is the expected value of all three alternative (a,b and c) and which would you choose?
Alternative Fixed Costs Variable Costs per unit A $100,000 $54 B $280,000 $38 C $560,000 $20Explanation / Answer
Expected future demand = Sum of Future demand multiplied by corresponding probability
= 5000*0.3+10000*0.25+15000*0.45 = 10750
Expected value of alternative A = Expected future demand * (Selling price - Variable cost) - Fixed cost = 10750*(100-54)-100000 = $ 394,500
Expected value of alternative B = Expected future demand * (Selling price - Variable cost) - Fixed cost = 10750*(100-38)-280000 = $ 386,500
Expected value of alternative C = Expected future demand * (Selling price - Variable cost) - Fixed cost = 10750*(100-20)-560000 = $ 300,000
Expected Value of alternative A is the maximum.
Therefore, I would choose alternative A.
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