-The expected monetary value of conducting a joint design is $ ___ -What is the
ID: 3332276 • Letter: #
Question
-The expected monetary value of conducting a joint design is $ ___
-What is the best decision based on an expected monetary value criterion? Internal engineers OR Joint Designs
Sox Engineering designs and constructs air conditioning and heating (HVAC) systems for hospitals and clinics. Currently the company's staff is overloaded with design work. There is a major design project due in 8 weeks. The penalty for completing the design late is $13,000 per week, since any delay will cause the facility to open later than anticipated, and cost the client significant revenue. If the company uses its inside engineers to complete the design, it will have to pay them overtime for all work. Sox has estimated that it will cost $13,000 per week (wages and overhead), including late weeks, to have company engineers complete the design. Sox is also considering having an outside engineering firm do the design. A bid of $92,000 has been received for the completed design. Yet another option for completing the design is to conduct a joint design by having a third engineering company complete all electromechanical components of the design at a cost of $58,000. Sox would then complete the rest of the design and control systems at an estimated cost of $32,000. Sox has estimated the following probabilities of completing the project within various time frames when using each of the three options. Those estimates are shown in the following table Probability of Completing the Design Option Internal Engineers External Engineers Joint Design On Time 0.4 0.1 0.1 Two Weeks Late 0.2 0.4 0.4 Three Weeks Late One Week Late 0.4 0.4 0.2 0.1 0.3 The expected monetary value using inside engineers to complete the design is (Enter your response as an integer.)Explanation / Answer
Given the fact that Sox engineering has to complete the project in 8 weeks and associated costs as,
Penalty for late completion = $13,000 per week
Cost of executing the project by the company engineers is $13,000 per week
Outside firm do the design = $92,000
Joint design, design by Engineering company at cost = $58,000
Joint design, design by Sox = $32,000
Expected monetary value (EMV) using inside or internal engineers
EMV = Sum product of the probabilities of associated costs
= Cost of completing on time + One week late + Two weeks late + Three weeks late
= 0.4 * (13000 * 8) + 0.4 * (13000 * 9 + 13000 * 1) + 0.2 * (13000 * 10 + 13000 * 2) + 0 = $124800
Expected monetary value (EMV) using outside engineering firm
EMV = Sum product of the probabilities of associated costs
= Cost of completing on time + One week late + Two weeks late + Three weeks late
= 0.1 * (92000) + 0.4 * (92000 + 13000 * 1) + 0.4 * (92000 + 13000 * 2) + 0.1 * (92000 + 13000 * 3) = $111,500
Expected monetary value (EMV) conducting a joint design
EMV = Sum product of the probabilities of associated costs
= Cost of completing on time + One week late + Two weeks late + Three weeks late
= 0.1 * (58000 + 32000) + 0.2 * (58000 + 32000 + 13000 * 1) + 0.4 * (58000 + 32000 + 13000 * 2) + 0.3 * (58000 + 32000 + 13000 * 3) = 8400 + 49000 + 33600 + 12600 = $114700
Best decision
Out of the three ways of completing the project, according on the Expected monetary value based on the given probabilities, choosing the external engineers is the best option as cost of executing the project with that option is the lowest among three.
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