A manufacturer makes custom tee shirts for rock groups. The manufacturer makes a

Question

A manufacturer makes custom tee shirts for rock groups. The manufacturer makes a profit of $15 per tee shirt. The fixed costs of building a large facility are $100,000 and the fixed costs of building a small facility are $60,000. The production levels for the large facility are 5,000, 10,000, 20,000 and 30,000; the small facility can only produce up to 20,000 level. The probabilities associated with the different levels of production are .15, .25, .4, & .2 respectively. c. Construct an Opportunity Loss Table. d. Construct an Expected Monetary Value Table. e. Construct an Expected Opportunity Loss Table (You must construct the chart)

Explanation / Answer

Preparatory Work

Profit for a decision option = (expected production x profit per tee shirt) – fixed cost of building.

These values are tabulated below:

Decision

Option No

Decision

Expected

Production

Profit

($)

1

Build large facility

5000

- 25000

2

10000

50000

3

20000

200000

4

30000

350000

5

Build small facility

20000

240000

Part (c)

Opportunity Loss for a particular decision option

= maximum over profits of all decision options – profit for the particular decision option

Opportunity Loss are tabulated below”

Decision

Option No

Decision

Opportunity Loss

($)

1

Build large facility

375000

2

300000

3

150000

4

0

5

Build small facility

110000

Part (d)

Expected Monetary Value for a particular decision option = sum of (profit x probability), summed over all possible profits.

So, Expected Monetary Value for ‘Building a large facility’

= (-25,000 x 0.15) + (50,000 x 0.25) + (200,000 x 0.4) + (350,000 x 0.2)

= 158750

Since for the small facility there is only one possible profit,

Expected Monetary Value for ‘Building a small facility = 240000.

Part (e)

Expected Opportunity Loss for a particular decision option = sum of (Opportunity Loss x probability), summed over all possible Opportunity Losses.

So, Expected Opportunity Loss for ‘Building a large facility’

= (375,000 x 0.15) + (300,000 x 0.25) + (150,000 x 0.4) + (0 x 0.2)

= 191250

Since for the small facility there is only one possible opportunity loss,

Expected opportunity loss for ‘Building a small facility = 110000.

Decision

Option No

Decision

Expected

Production

Profit

($)

1

Build large facility

5000

- 25000

2

10000

50000

3

20000

200000

4

30000

350000

5

Build small facility

20000

240000

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