The EMV for option a is $ and the EMV for option b is $. Therefore, option | has the highest expected monetary value. (Enter your responses as integers.)
The EMV for option a is $ and the EMV for option b is $. Therefore, option | has the highest expected monetary value. (Enter your responses as integers.)
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Question
Create a Decision Tree for this problem and show your work
Transcribed Image Text:MacDonald Products, Inc., of Clarkson, New York, has the option of
(a) proceeding immediately with production of a new top-of-the-line stereo TV that has just completed prototype testing or
(b) having the value analysis team complete a study.
If Ed Lusk, VP for operations, proceeds with the existing prototype (option a), the firm can expect sales to be 100,000 units at $550 each, with a probability of 0.60 and a 0.40 probability of 75,000 at $550. If, however, he uses the value analysis
team (option b), the firm expects sales of 75,000 units at $750, with a probability of 0.70 and a 0.30 probability of 70,000 units at $750. Value engineering, at a cost of $100,000, is only used in option b. Which option has the highest expected
monetary value (EMV)?
The EMV for option a is $ and the EMV for option b is $. Therefore, option
has the highest expected monetary value. (Enter your responses as integers.)
Expert Solution
Step 1 Introduction:
Here, there are two options, these options are:
Option a: go with the existing prototype
Option b: using the value analysis team.
The EMV could be determined using the formula,
((Probability of the state of nature*Payoff of this state of nature)) - Total Costs
Here, the payoff is the sales value, hence, we would go with the highest EMV value, and we would select the alternative which has this highest EMV value.
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