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A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars). State of Nature Decision Low Alternative Demand $1 Medium Demand $2 High Demand 53 Manufacture, d -5 55 115 Purchase, d₂ 60 85 The state-of-nature probabilities are P(s₁) = 0.35, P(52) = 0.35, and P(53) = 0.30. (a) Use a decision tree to recommend a decision. The best decision is to purchase the component part. (b) Use EVPI to determine whether the company should attempt to obtain a better estimate of demand, assuming the estimate would come at no further cost. EVPI = 9 The EVPI suggests that the company should consider an attempt to obtain a better estimate of demand. (c) A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F|s₁) = 0.10 P(F/52) = 0.40 P(FIS)=0.60 P(U\S₁) = 0.90 P(U|S2) = 0.60 P(Uls) = 0.40 What is the probability that the market research report will be favorable? P(F) 0.355 (d) What is the company's optimal decision strategy? If F, then d₁. If U, then d₁. If F, then d₂. If U, then d₂. If F, then d₁. If U, then d₂. If F, then d₂. If U, then d₁. (e) What is the expected value (in thousands of dollars) of the market research information? EVSI - thousand dollars (f) What is the efficiency (as a %) of the information? (Round your answer to one decimal place.) Efficiency= %

A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars). State of Nature Decision Low Alternative Demand $1 Medium Demand $2 High Demand 53 Manufacture, d -5 55 115 Purchase, d₂ 60 85 The state-of-nature probabilities are P(s₁) = 0.35, P(52) = 0.35, and P(53) = 0.30. (a) Use a decision tree to recommend a decision. The best decision is to purchase the component part. (b) Use EVPI to determine whether the company should attempt to obtain a better estimate of demand, assuming the estimate would come at no further cost. EVPI = 9 The EVPI suggests that the company should consider an attempt to obtain a better estimate of demand. (c) A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F|s₁) = 0.10 P(F/52) = 0.40 P(FIS)=0.60 P(U\S₁) = 0.90 P(U|S2) = 0.60 P(Uls) = 0.40 What is the probability that the market research report will be favorable? P(F) 0.355 (d) What is the company's optimal decision strategy? If F, then d₁. If U, then d₁. If F, then d₂. If U, then d₂. If F, then d₁. If U, then d₂. If F, then d₂. If U, then d₁. (e) What is the expected value (in thousands of dollars) of the market research information? EVSI - thousand dollars (f) What is the efficiency (as a %) of the information? (Round your answer to one decimal place.) Efficiency= %

Understanding Business
Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars). State of Nature Decision Low Alternative Demand $1 Medium Demand $2 High Demand 53 Manufacture, d -5 55 115 Purchase, d₂ 60 85 The state-of-nature probabilities are P(s₁) = 0.35, P(52) = 0.35, and P(53) = 0.30. (a) Use a decision tree to recommend a decision. The best decision is to purchase the component part. (b) Use EVPI to determine whether the company should attempt to obtain a better estimate of demand, assuming the estimate would come at no further cost. EVPI = 9 The EVPI suggests that the company should consider an attempt to obtain a better estimate of demand. (c) A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F|s₁) = 0.10 P(F/52) = 0.40 P(FIS)=0.60 P(U\S₁) = 0.90 P(U|S2) = 0.60 P(Uls) = 0.40 What is the probability that the market research report will be favorable? P(F) 0.355 (d) What is the company's optimal decision strategy? If F, then d₁. If U, then d₁. If F, then d₂. If U, then d₂. If F, then d₁. If U, then d₂. If F, then d₂. If U, then d₁. (e) What is the expected value (in thousands of dollars) of the market research information? EVSI - thousand dollars (f) What is the efficiency (as a %) of the information? (Round your answer to one decimal place.) Efficiency= %
Transcribed Image Text:A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars). State of Nature Decision Low Alternative Demand $1 Medium Demand $2 High Demand 53 Manufacture, d -5 55 115 Purchase, d₂ 60 85 The state-of-nature probabilities are P(s₁) = 0.35, P(52) = 0.35, and P(53) = 0.30. (a) Use a decision tree to recommend a decision. The best decision is to purchase the component part. (b) Use EVPI to determine whether the company should attempt to obtain a better estimate of demand, assuming the estimate would come at no further cost. EVPI = 9 The EVPI suggests that the company should consider an attempt to obtain a better estimate of demand. (c) A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F|s₁) = 0.10 P(F/52) = 0.40 P(FIS)=0.60 P(U\S₁) = 0.90 P(U|S2) = 0.60 P(Uls) = 0.40 What is the probability that the market research report will be favorable? P(F) 0.355 (d) What is the company's optimal decision strategy? If F, then d₁. If U, then d₁. If F, then d₂. If U, then d₂. If F, then d₁. If U, then d₂. If F, then d₂. If U, then d₁. (e) What is the expected value (in thousands of dollars) of the market research information? EVSI - thousand dollars (f) What is the efficiency (as a %) of the information? (Round your answer to one decimal place.) Efficiency= %
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