b) The expected monetary value using an outside engineering firm to complete the
ID: 378082 • Letter: B
Question
b) The expected monetary value using an outside engineering firm to complete the design is ___ (Enter your answer as an integer.)
c) The expected monetary value of conducting a joint design is ____ (Enter your answer as an integer.)
d) What is the best decision based on an expected monetary value criterion?
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 9 weeks. The penalty for completing the design late is $15,000 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 $10,000 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 $82,000 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 $54,000. Sox would then complete the rest of the design and control systems at an estimated cost of $30,000. 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 0.2 0.2 One Week Late 0.4 0.3 0.4 Two Weeks Late 0.2 0.2 0.3 Three Weeks Late 0.3 The expected monetary value using inside engineers to complete the design is (Enter your response as an integer.)Explanation / Answer
Cost of completing the project using inside engineers = total overtime cost + total penalty cost.
The project duration is 9 weeks, so there is a fixed overtime cost of 9 weeks = 9*10000 = 90000
The other part of the cost is variable depending upon how long the project takes more than 9 weeks to complete. The total cost = 90000 + (10000+15000)*d , where d is number of weeks of delay. For example, if the project is on time, then d = 0, and for delay by 3 weeks, d = 3, so total cost for 3 weeks delay = 90000 + (10000+15000)*3 = 165000
Similarly, total cost for external engineers = 82000 + 15000*d, because there is only penalty cost for delay and no overtime cost in this case
Total cost for Joint Design = 54000 + 30000 + 15000*d
Cost matrix is as follows
b) Expected Monetary Value (EMV) of using an outide engineering firm to complete the design = -(82000*0.2 + 97000*0.3 + 112000*0.2 + 127000*0.3) = -106,000 (it is written with negative sign, because cost is a cash outflow, so less negative is more desirable)
c) EMV of conducting a jont design = -(84000*0.2 + 99000*0.4 + 114000*0.3 + 129000*0.1) = -103,500
d) EMV of inside engineers = -(90000*0.4 + 115000*0.4 + 140000*0.2 + 165000*0) = -110,000
EMV of conducting a Joint Design is the maximum (least negative). Therefore, it is the best decision based on EMV criterion.
Weeks of Delay 0 1 2 3 Inside Engineers 90000 115000 140000 165000 External engineers 82000 97000 112000 127000 Joint Design 84000 99000 114000 129000Related Questions
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