Pearson eText Principles of Operations Management: Sustainability and Supply Chain Management -- Instant Access (Pearson+)
Pearson eText Principles of Operations Management: Sustainability and Supply Chain Management -- Instant Access (Pearson+)
11th Edition
ISBN: 9780135639221
Author: Jay Heizer, Barry Render
Publisher: PEARSON+
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Chapter 5, Problem 18P
Summary Introduction

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.

Expert Solution & Answer
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Answer to Problem 18P

The low-technology approach can be selected with a cost of $145,000.

Explanation of Solution

Given information:

Marketforecast=200,000units

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

Pearson eText Principles of Operations Management: Sustainability and Supply Chain Management -- Instant Access (Pearson+), Chapter 5, Problem 18P , additional homework tip  1

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

Pearson eText Principles of Operations Management: Sustainability and Supply Chain Management -- Instant Access (Pearson+), Chapter 5, Problem 18P , additional homework tip  2

Calculation of total cost:

Low technology:

  • Probability 0.3

Totalcost=Fixedcost+Variablecost=$45,000+(200,000×$0.55)=$155,000

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

Totalcost=Fixedcost+Variablecost=$45,000+(200,000×$0.50)=$145,000

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

Totalcost=Fixedcost+Variablecost=$45,000+(200,000×$0.45)=$135,000

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

Totalcost=Fixedcost+Variablecost=$65,000+(200,000×$0.45)=$155,000

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

Totalcost=Fixedcost+Variablecost=$65,000+(200,000×$0.40)=$145,000

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

Totalcost=Fixedcost+Variablecost=$65,000+(200,000×$0.35)=$135,000

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

Totalcost=Fixedcost+Variablecost=$75,000+(200,000×$0.40)=$155,000

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

Totalcost=Fixedcost+Variablecost=$75,000+(200,000×$0.35)=$145,000

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.

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Chapter 5 Solutions

Pearson eText Principles of Operations Management: Sustainability and Supply Chain Management -- Instant Access (Pearson+)

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