MacDonald Products, Inc., of Clarkson, New York, has the option of (a) proceedin

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 80,000 units at $500 each, with a probability of 0.39 and a 0.61 probability of 60,000 at $500. If, however, he uses the value analysis team (option b), the firm expects sales of 90,000 units at $760, with a probability of 0.68 and a 0.32 probability of 70,000 units at $760. Value engineering, at a cost of $115,000, is only used in option b. Which option has the highest expected monetary value EMV)? The EMV for option a is $1 | and the EMV for option b is $1 I. Therefore, option | | has the highest expected monetary value. (Enter your responses as integers.)

Explanation / Answer

EMV = (p1V1+p2V2+...) - Costs

where pi is probability and Vi is Value in sales

Option a -

EMV = (80000*500*0.39)+(60000*500*0.61) = 70000000 $

Option b -

EMV = (90000*760*0.68)+(70000*760*0.32)-115000 = 121485000 $

Option B has highest expected monetary value

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