Zhu Mandaduring oorsderig te inboduction of a family of new products. Long erm d
ID: 383862 • Letter: Z
Question
Zhu Mandaduring oorsderig te inboduction of a family of new products. Long erm demand for he podud goup s somewhat predictable, so the menufacturer must be concemed with the risk of dhoosing a process that is inappropriate. Faye Zhu is VP of operations. She can choose among batch manufacturing or austom manufacturing, or she can inveet in group technology. Dhu won't be able to forecast demand accurtely until er she makes the process dhoice. Demand will be classited into four compartments poor, fair, good, and excellent. The table below indicaes the payofs (profits) associated Fair 0.10Sc0.000 $850,000 $2.100,000 $200,000 $800,000 $1,200,000 $1,400,000 $200,000 $300,000 700,000 Group technology1.200,000-$500000$22,000 $2,100,000 a) The atemative that provides 2hu the greatest expected monetary value (EMV) is The EMV for this decision is $ fenter your anawer as a whole mmber) b)Theanort that FayeZhu would be wing to for aforecast tat would acourely determee te level ofdemand ite Mre·S(-your answer as a whole number). Emer your wer in each ofthe answer boxes. provide a framework to quantify the values of outcomes and the probabilities of achieving them MacBook Air 888 a 5 6 8Explanation / Answer
Solution a)
The EMV is calculated by the sumproduct of Probability and Value generated by the respective option.
So, for this case, we have:
EMV for Batch Process = (0.1* (-200000))+(0.4*800000)+(0.3*1200000)+(0.2*1400000) = $ 940,000
EMV for Custom Process = (0.1*200000)+(0.4*300000)+(0.3*650000)+(0.2*700000) = $ 475,000
EMV for Group Technology = (0.1*(-1200000))+(0.4*(-500000))+(0.3*22000)+(0.2*2100000) = $ 106,600
Clearly, EMV for Batch Process is maximum. Therefore, alternative that provides maximum EMV is Batch and its EMV for this decision is $940,000
Solution b)
In order to find out the amount that Faye Zhu would be willing to pay, we have to calculate the Expected Value with Perfect Information (EVPI).
And, EVPI = Expected Value with Perfect Information - EMV calculated above i.e 940000
Now, For Expected Value with Perfect Information, we assume that the best alternative ( Maximum Payoff for the probability) among the given scenario is chosen and accordingly we calulate the expected payoff, which will be our Expected Value with Perfect Information
so, Expected Value with Perfect Information = (0.1*200000)+(0.4*800000)+(0.3*1200000)+(0.2*2100000) = $1,120,000
Therefore, the maximum amount that Faye Zhu would be willing to pay for a forecast that would determine accurate demand = 1120000 - 940000 = $ 180,000
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