Concept explainers
To determine: How to select the best decision based on Expected Monetary Value (EMV) criterion.
Introduction: Expected Monetary Value (EMV) is a system for calculating expected returns for certain decision made by a company.
Answer to Problem 18P
The low-technology approach can be selected with a cost of $145,000.
Explanation of Solution
Given information:
Strategies used:
Low-tech | ||
Fixed cost | Probability | Variable cost |
$45,000.00 | 0.3 | $0.55 |
0.4 | $0.50 | |
0.3 | $0.45 |
Sub-contract | ||
Fixed cost | Probability | Variable cost |
$65,000.00 | 0.7 | $0.45 |
0.2 | $0.40 | |
0.1 | $0.35 |
High-tech | ||
Fixed cost | Probability | Variable cost |
$75,000.00 | 0.9 | $0.40 |
0.1 | $0.35 | |
0 | $0.00 |
Market forecast | 200,000 | Total | |
Low-tech | |||
Fixed cost | Probability | Variable cost | |
$45,000.00 | 0.3 | $0.55 | $155,000.00 |
0.4 | $0.50 | $145,000.00 | |
0.3 | $0.45 | $135,000.00 | |
Sub-contract | Total | ||
Fixed cost | Probability | Variable cost | |
$65,000.00 | 0.7 | $0.45 | $155,000.00 |
0.2 | $0.40 | $145,000.00 | |
0.1 | $0.35 | $135,000.00 | |
High-tech | Total | ||
Fixed cost | Probability | Variable cost | |
$75,000.00 | 0.9 | $0.40 | $155,000.00 |
0.1 | $0.35 | $145,000.00 | |
0 | $0.00 | $0.00 |
Calculation of total cost:
Low technology:
- Probability 0.3
With a probability of 0.3, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.55. The product is added with the fixed cost, which is $45,000. The resultant total cost is $155,000.
- Probability 0.4
With a probability of 0.4, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.50. The product is added with the fixed cost, which is $45,000. The resultant total cost is $145,000.
- Probability 0.3
With a probability of 0.3, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.45. The product is added with the fixed cost, which is $45,000. The resultant total cost is $135,000.
Sub-contract:
- Probability 0.7
With a probability of 0.7, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.45. The product is added with the fixed cost, which is $65,000. The resultant total cost is $155,000.
- Probability 0.2
With a probability of 0.2, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.40. The product is added with the fixed cost which is $65,000. The resultant total cost is $145,000.
- Probability 0.1
With a probability of 0.1, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.35. The product is added with the fixed cost which is $65,000. The resultant total cost is $135,000.
High-tech:
- Probability 0.9
With a probability of 0.9, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.40. The product is added with the fixed cost which is $75,000. The resultant total cost is $155,000.
- Probability 0.1
With a probability of 0.1, the variable cost is calculated by multiplying the total market forecast of 200,000 with the variable cost $0.35. The product is added with the fixed cost which is $75,000. The resultant total cost is $145,000.
Hence, from the above calculations, it can be inferred that market forecast for low-technology (which consists of hiring several new junior engineers)at the cost of $145,000 can be selected.
Want to see more full solutions like this?
Chapter 5 Solutions
PRIN.OF OPERATIONS MANAGEMENT-MYOMLAB
- Madhu Ranadive, president of Davisville Toy Company, Inc., in Stratford, Ontario, has just reviewed the design of a new pull-toy locomotive for 1- to 3-year-olds. Madhu’s design and marketing staff are very enthusiastic about the market for the product and the potential of follow-on circus train cars. Madhu’s production people have worked out the manufacturing issues and produced a successful pilot run. However, the quality testing staff suggests that under certain conditions, a hook to attach cars to the locomotive and the crank for the bell can be broken off. This is an issue because children can choke on small parts. In the quality test, 1- to 3-year-olds were unable to break off these parts and there were no failures. But when the test simulated the force of an adult tossing the locomotive into a toy box or a 5-year-old throwing it on the floor, there were failures. The estimate is that one of the two parts can be broken off four times out of 100 000 throws. Neither the design nor…arrow_forwardTyped solution The product design group of Iyengar Electric Supplies, Inc., has determined that it needs to design a new series of switches. It must decide on one of three design strategies. The market forecast is for 200,000 units. The better and more sophisticated the design strategy and the more time spent on value engineering, the less will be the variable cost. The chief of engineering design, Dr. W. L. Berry, has decided that the following costs are a good estimate of the initial and variable costs connected with each of the three strategies explained below. Low-tech: a low-technology, low-cost process consisting of hiring several new junior engineers. This option has a fixed cost of $40,000 and variable-cost probabilities of 0.5 for $0.56, 0.1 for $0.47,and 0.4 for $0.41. Subcontract: a medium-cost approach using a good outside design staff. This approach would have a fixed cost of $75,000 and variable-cost probabilities of 0.7 of $0.49, 0.2 of $0.46, and…arrow_forwardAnalyses and design may be compared using the following criteria: The difference between analyses and designs is that the former generates models, whilst the latter focuses on the final product.arrow_forward
- Design Within Reach (DWR) Design Within Reach (DWR) is one of the leading hardwood furniture manufacturers. While DWR has many small competitors, none of them controls a significant market share. Like most furniture manufacturers, DWR sells its products to a wide variety of small furniture stores, none of which represents a large percentage of DWR's sales. DWR can choose among many wood (an undifferentiated commodity) suppliers to find the best price and delivery. The growth rate of the hardwood furniture industry has slowed considerably in recent years. Many consumers purchase "IKEA type" furniture made of composite wood, which is substantially less expensive than hardwood furniture. The level of direct competition in the hardwood furniture industry can best be described as moderate because the slowing growth rate offsets the numerous firms in the industry. low because of the numerous firms in the industry and the slowing growth rate low because of the slowing growth rate and the…arrow_forwardPlease answer correct option Don't answer by pen paperarrow_forwardState What is redundancy and how can it improve product design ?arrow_forward
- Detail the design principles as well as the overall concept of the design. What qualities must a product need to have in order to be considered "excellent" in terms of its design?arrow_forwardExplain what is redundancy and how can it improve product design ?arrow_forwardIn the Product Service Design chapter, which term described including the "voice of the customer" in designing the new product or service? Select one: a. QFD b. Reverse Engineering C. Concurrent Engineeringarrow_forward
- Describe What is redundancy and how can it improve product design ?arrow_forwardWhat effects do quality planning have on system output, performance, maintainability, reliability, and functionality?arrow_forwardAnalyses and designs may be contrasted in the following ways: Analyses include individuals, while designs are only concerned with the final product. Analyses and designs vary in that the former generates models, but the latter does not.arrow_forward
- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,Operations ManagementOperations ManagementISBN:9781259667473Author:William J StevensonPublisher:McGraw-Hill EducationOperations and Supply Chain Management (Mcgraw-hi...Operations ManagementISBN:9781259666100Author:F. Robert Jacobs, Richard B ChasePublisher:McGraw-Hill Education
- Purchasing and Supply Chain ManagementOperations ManagementISBN:9781285869681Author:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. PattersonPublisher:Cengage LearningProduction and Operations Analysis, Seventh Editi...Operations ManagementISBN:9781478623069Author:Steven Nahmias, Tava Lennon OlsenPublisher:Waveland Press, Inc.