Question 101) Barbour Electric is considering the introduction of a new pr

101) Barbour Electric is considering the introduction of a new product. This product can be produced in one of several ways: (a) using the present assembly line at a cost of $25 per unit, (b) using the current assembly line after it has been overhauled (at a cost of $10,000) with a cost of $22 per unit; and (c) on an entirely new assembly line (costing $30,000) designed especially for the new product with a per unit cost of $20. Barbour is worried, however, about the impact of competition. If no competition occurs, they expect to sell 15,000 units the first year. With competition, the number of units sold is expected to drop to 9,000. At the moment, their best estimate is that there is a 40% chance of competition. They have decided to make their decision based on the first year sales.

(a) Develop the decision table (EMV).

(b) Develop a decision table (EOL).

(c) What should they do?

102) The following payoff table provides profits based on various possible decision alternatives and various levels of demand.

The probability of a low demand is 0.4, while the probability of a medium and high demand is each 0.3.

(a) What decision would an optimist make?

(b) What decision would a pessimist make?

(c) What is the highest possible expected monetary value?

(d) Calculate the expected value of perfect information for this situation.

103) The ABC Co. is considering a new consumer product. They believe that the XYZ Co. may come out with a competing product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is $40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of $100,000. For what value of probability that XYZ will offer a competing product will ABC be indifferent between the alternatives?

104) A company is considering expansion of its current facility to meet increasing demand. A major expansion would cost $500,000, while a minor expansion would cost $200,000. If demand is high in the future, the major expansion would result in an additional profit of $800,000, but if demand is low, then there would be a loss of $500,000. If demand is high, the minor expansion will result in an increase in profits of $200,000, but if demand is low, then there is a loss of $100,000. The company has the option of not expanding. For what probability of a high demand will the company be indifferent between the two expansion alternatives?

105) Orders for clothing from a particular manufacturer for this year’s Christmas shopping season must be placed in February. The cost per unit for a particular dress is $20 while the anticipated selling price is $50. Demand is projected to be 50, 60, or 70 units. There is a 40 percent chance that demand will be 50 units, a 50 percent chance that demand will be 60 units, and a 10 percent chance that demand will be 70 units. The company believes that any leftover goods will have to be scrapped. How many units should be ordered in February?

106) Suppose that the payoff from an investment depends upon market conditions. A great market has a payoff of $200,000, a normal market has a payoff of $100,000, and a poor market has a payoff of $20,000. Using an ?-value of 0.3, what is the criterion of realism value?

107) A market research survey is available for $5,000. Using a decision tree analysis, it is found that the expected monetary value with no survey is $49,000. If the expected value of sample information is -$4,000, what is the expected monetary value with the survey?

108) David N. Goliath is planning to open a sporting goods store. However, the initial investment is $120,000. He currently has this money in a certificate of deposit earning 10 percent. He may leave it there if he decides not to open the store. If he opens the store and it is successful he will generate a profit of $50,000. If it is not successful, he will lose $90,000. What would the probability of a successful store have to be for David to prefer this to investing in a CD?

109) You are considering adding a new food product to your store for resale. You are certain that, in a month, minimum demand for the product will be 6 units, while maximum demand will be 8 units. (Unfortunately, the new product has a one-month shelf life and is considered to be waste at the end of the month.) You will pay $60/unit for this new product while you plan to sell the product at a $40/unit profit. The estimated demand for this new product in any given month is 6 units(p=0.1), 7 units(p=0.4), and 8 units(p=0.5). Using EMV analysis, how many units of the new product should be purchased for resale?

110) Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has the option of not opening at either site. He believes that there is a 50 percent chance that demand will be high. A market research study will cost $5,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable.

(a) Should Mark use the study? Why?

(b) If the study is done and the results are favorable, what would Mark’s expected profit be?

111) Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has the option of not opening either. He believes that there is a 50 percent chance that demand will be high. Mark can purchase a market research study. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. Should Mark use the study? Why? What is the maximum amount Mark should be willing to pay for this study? What is the maximum amount he should pay for any study?

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