Use expected value to recommend a decision.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The Gorman 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):
| Decision | State of Nature | ||
| Alternative | Low Demand (S1) | Medium Demand (S2) | High Demand )S3) |
|
Manufacture, d(1) |
-20 | 40 | 100 |
| Purchase, d(2) | 10 | 45 | 70 |
The state-of-nature probabilities are P s1= 0.35, P s2= 0.35, and P s3= 0.30
Use expected value to recommend a decision.
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