MacDonald Products, Inc., of Clarkson, New York, has the option of (a) proceedin
ID: 3272341 • Letter: M
Question
MacDonald Products, Inc., of Clarkson, New York, has the option of
(a) proceeding immediately with production of a new top-of-the-line stereo TV that has just completed prototype testing or
(b) having the value analysis team complete a study.
If Ed Lusk, VP for operations, proceeds with the existing prototype (option a), the firm can expect sales to be
120 comma 000120,000
units at
$560560
each, with a probability of
0.460.46
and a
0.540.54
probability of
70 comma 00070,000
at
$560560.
If, however, he uses the value analysis team (option b), the firm expects sales of
80 comma 00080,000
units at
$750750,
with a probability of
0.680.68
and a
0.320.32
probability of
70 comma 00070,000
units at
$750750.
Value engineering, at a cost of
$115 comma 000115,000,
is only used in option b. Which option has the highest expected monetary value (EMV)?
The EMV for option a is
$nothing
and the EMV for option b is
$nothing.
Therefore, option
has the highest expected monetary value.
(Enter
your responses as
integers.)
Explanation / Answer
Ans:
EMV for Option a:
=0.46*120000*560+0.54*70000*560
=52080000
EMV for Option b:
=0.68*80000*750+0.32*70000*750
=57600000
Option b has higher expected monetary value.
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