Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
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Chapter 12, Problem 22P
(a):
To determine
Calculate the expected return.
(b):
To determine
Calculate the probability.
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ABC Inc. must make a decision on its current capacity for next year. Estimated profits (in $000s) based on next year's
demand are shown in the table below.
Alternative
Expand
Subcontract
Do nothing
Refer to the information above. Assume that ABC Inc. has hired a marketing research firm that provided additional
information regarding next year's demand. Suppose that the probabilities of low and high demand are assessed as follows:
P(Low) = 0.4 and P(High) = 0.6.
What is the expected value under certainty?
160
0
Next Year's Demand
Low High
$100 $200
$50 $120
$40
$50
140
200
In preparing for the upcoming holiday season, Fresh Toy Company (FTC) designed a new doll called The Dougie that teaches children how to dance. The fixed cost to produce the doll is $100,000. The variable cost, which includes material, labor, and shipping costs, is $34 per doll. During the holiday
selling season, FTC will sell the dolls for $42 each. If FTC overproduces the dolls, the excess dolls will be sold in January through a distributor who has agreed to pay FTC $10 per doll. Demand for new toys during the holiday selling season is extremely uncertain. Forecasts are for expected sales of
60,000 dolls with a standard deviation of 15,000. The normal probability distribution is assumed to be a good description of the demand. FTC has tentatively decided to produce 60,000 units (the same as average demand), but it wants to conduct an analysis regarding this production quantity before
finalizing the decision.
(a) Create a what-if spreadsheet model using a formula that relates the…
A European consortium has spent a considerable amount of time and money developing a new supersonic aircraft. The aircraft gets high marks on all performance measures except noise. In fact, because of the noise, the consortium’s management is concerned that the US government may impose restrictions on some of the American airports where the aircraft can land. Management judges a 50–50 chance that there will be some restrictions. Without restrictions, management estimates its (present discounted) profit at $125 million; with restrictions, its profit would be only $25 million. Management must decide now, before knowing the government’s decision, whether to redesign parts of the aircraft to solve the noise problem. The cost of the redesign program is $25 million. There is a 0.6 chance that the redesign program will solve the noise problem (in which case, full landing rights are a certainty) and a 0.4 chance it will fail. Using a decision tree, determine the consortium’s best course of…
Chapter 12 Solutions
Contemporary Engineering Economics (6th Edition)
Ch. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10PCh. 12 - Prob. 11P
Ch. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 25PCh. 12 - Prob. 26PCh. 12 - Prob. 27PCh. 12 - Prob. 28P
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