A company is introducing a new snowshoe and must decide how much capacity will b
ID: 367392 • Letter: A
Question
A company is introducing a new snowshoe and must decide how much capacity will be needed to manufacture it. They developed Table 2.4 showing expected profit for the first year ($000’s).
Table 2.4
Alternative
Demand
Low (.30)
Mod. (.50)
Heavy (.20)
Small Plant
40
50
55
Medium Plant
20
75
75
Large Plant
-10
60
100
a) Using the information in Table 2.4, what is the expected value of the best decision? What is the value of the decision?
b) Given the information in Table 2.4, what is the expected value with perfect information? What is the expected value of perfect information?
Alternative
Demand
Low (.30)
Mod. (.50)
Heavy (.20)
Small Plant
40
50
55
Medium Plant
20
75
75
Large Plant
-10
60
100
Explanation / Answer
a) Best decision will be basis Maximax strategy. In this, best possible payoff is determined by choosing alternative with that payoff.
Best option for each of three categories are:
Small plant = 55
Medium plant = 75
Large plant = 100
Hence, choosing the Large plant with expected return of 100
b) For best information, each plant with probabilities under each demand category can be multiplied to give weighted expected value
Small plant = 40*0.3 + 50*0.5 + 55*0.2 = 48
Medium plant = 20*0.3 + 75*0.5 + 75*0.2 = 59
Large plant = -10*0.3 + 60*0.5 + 100*0.2 = 47
Hence, choosing Medium plant is best
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.