Operations Management: Sustainability and Supply Chain Management (12th Edition)
Operations Management: Sustainability and Supply Chain Management (12th Edition)
12th Edition
ISBN: 9780134130422
Author: Jay Heizer, Barry Render, Chuck Munson
Publisher: PEARSON
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Chapter A, Problem 3P

a)

Summary Introduction

To determine: The greatest expected monetary value.

Expected monetary value (EMV) is expected value or payout that has different possible state of nature, each with their associated possibilities.

b)

Summary Introduction

To determine: The expected value of perfect information (EVPI)

Introduction: The maximum value willing to pay in order to gain for information. In EVPI we determine the amount which is willing to pay for the perfect information is said to be EVPI.

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3. A toy manufacturer makes stuffed kittens and puppies which have relatively lifelike motions. There are three different mechanisms that can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand, a 0.45 probability of moderate demand, and a probability of 0.35 of heavy demand. Payoffs for each mechanism-demand combination appear in the table below. Wind-up action Pneumatic action Electronic action Demand Light Moderate $250,000 $90,000 -$100,000 400,000 440,000 400,000 Heavy 650,000 740,000 780,000 Construct the appropriate decision tree to analyze this problem. Use standard symbols for the tree. Analyze the tree to select the optimal decision for the manufacturer.
Payoff Table Decision Alternatives Demand Low Medium High Small, d1 400 500 600 Medium, d2 100 600 800 Large, d3 -300 400 1200   1). If nothing is known about the demand probabilities, what are the recommended decision using the Maximax       (optimistic), Maximin (pessimistic) and Equally Likely? 2). If P(low) = 0.20, P(medium) = 0.35, and P(high) = 0.45.  What is the recommended decision using the expected monetary value approach? 3). What is the expected value of perfect information (EVPI)?
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