A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience (1) increasing exchange rates; (2) stable exchange rates; and (3) decreasing exchange rates. The business believes that the probability for increasing, stable and decreasing exchange rates are 0.6, 0.3, and 0.1, respectively. The following payoff table depicts the costs for each decision alternative under different states of nature. Table 3 Decision State of Nature Increasing exchange Stable exchange Decreasing rates (0.6) rates (0.3) exchange rates (0.1) Expand existing $800,000 $650.000 $550,000 facilities Acquire a competitor 500,000 300,000 200,000 Subcontract 250,000 250,000 250,000 production Using Table 3, Choose the right pair of best decision alternative and cost using expected value?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor,
or subcontract production. The company believes the product will either experience (1) increasing exchange rates; (2) stable exchange rates; and (3) decreasing exchange rates. The
business believes that the probability for increasing, stable and decreasing exchange rates are 0.6, 0.3, and 0.1, respectively. The following payoff table depicts the costs for each decision
alternative under different states of nature.
Table 3
Decision
State of Nature
Increasing exchange Stable exchange Decreasing
rates (0.6)
rates (0.3)
exchange rates
(0.1)
Expand existing
$800.000
$650,000
$550,000
facilities
Acquire a competitor
500,000
300,000
200,000
Subcontract
250,000
250,000
250,000
production
Using Table 3, Choose the right pair of best decision alternative and cost using expected value?
Transcribed Image Text:A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience (1) increasing exchange rates; (2) stable exchange rates; and (3) decreasing exchange rates. The business believes that the probability for increasing, stable and decreasing exchange rates are 0.6, 0.3, and 0.1, respectively. The following payoff table depicts the costs for each decision alternative under different states of nature. Table 3 Decision State of Nature Increasing exchange Stable exchange Decreasing rates (0.6) rates (0.3) exchange rates (0.1) Expand existing $800.000 $650,000 $550,000 facilities Acquire a competitor 500,000 300,000 200,000 Subcontract 250,000 250,000 250,000 production Using Table 3, Choose the right pair of best decision alternative and cost using expected value?
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