Zhu Manufacturing is considering the introduction of a family of new products. L
ID: 378823 • Letter: Z
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 custommanufacturing, 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
0.15
0.40
0.25
0.20
BatchBatch
$300,000
$1,200,000
$1,100,000
$1,200,000
CustomCustom
$200,000
$250,000
$700,000
$700,000
Group technologyGroup technology
$1,250,000
$600,000
$500,000
$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).
Demand
Poor
Fair
Good
Excellent
Probability
0.15
0.40
0.25
0.20
BatchBatch
$300,000
$1,200,000
$1,100,000
$1,200,000
CustomCustom
$200,000
$250,000
$700,000
$700,000
Group technologyGroup technology
$1,250,000
$600,000
$500,000
$2,000,000
Explanation / Answer
a)
Expected Monetary Value (EMV) of Batch = -300000*.15 + 1200000*.4 + 1100000*.25 + 1200000*.2 = 950,000
Expected Monetary Value (EMV) of Custom = 200000*.15 + 250000*.4 + 700000*.25 + 700000*.2 = 455,000
Expected Monetary Value (EMV) of Group Tech = -1250000*.15 - 600000*.4 + 500000*.25 + 2000000*.2 = 97,500
The alternative that provides Zhu the greatest expected monetary value (EMV) is
Batch
EMV for this decision is $ 950,000
b) Expected Value with Perfect Information (EVwPI) = Maximum payoff for poor demand * probability of poor demand + Maximum payoff for fair demand * probability of fair demand + Maximum payoff for good demand * probability of good demand + Maximum payoff for excellent demand * probability of excellent demand
= 200000*.15 + 1200000*.4 + 1100000*.25+2000000*.2 = 1,185,000
Expected Value of Perfect Information (EVPI) = EVwPI - EMVmax = 1185000 - 950000 = $ 235,000
The amount that Faye Zhu would be willing to pay for a forecast that would accurately determine the level of demand in the future = $ 235,000
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