A plastic Manufacturing company produces plastic chairs. The company suspects th
ID: 388723 • Letter: A
Question
A plastic Manufacturing company produces plastic chairs. The company suspects the present trend towards stronger and simpler chairs will last for a long time. The Company must therefore decide among four alternatives of providing for anticipated higher demand.
The alternatives are:
- Completely overhauling the existing plant and installing computer operated plastic producing machines
- Expanding the current plant by adding more machines
- Buying a competitor's plant which is on sale
- Limit production to the current plant capacity.
The payoff table is shown below :
You are required to:
a. Use the maximax criterion to advise the Company on which line of action to take.
b. Use the maximin criterion to advise the Company on the optimal line of action
Explanation / Answer
Following is the demand for every action alternative according to question -
Action Alternatives
High
Moderate
Low
Failure
Overhaul
10,000
15,000
10,000
-55,000
Expand
70,000
30,000
15,000
-75,000
Buy
60,000
20,000
25,000
-65,000
Do Nothing
4,000
3,000
2,000
-6,000
a. Advise based on Maximax criterion:
On using maximax criterion, the alternative with the highest return is selected. It is more of an optimistic strategy in which an alternative providing the best of the best payoff is opted for. Following table represents the payoff under maximax criterion per alternative which is then aggregated for the final outcome –
Action Alternatives
High
Moderate
Low
Failure
Maximax Criterion (Max)
Overhaul
10,000
15,000
10,000
-55,000
15,000
Expand
70,000
30,000
15,000
-75,000
70,000
Buy
60,000
20,000
25,000
-65,000
60,000
Do Nothing
4,000
3,000
2,000
-6,000
4,000
Maximax outcome = Max of {15,000 70,000 60,000 4,000} =
70,000
Thus, the line of action to be taken is:
Expand the current plant by adding more machines with expectation for high demand (Cell with payoff 70,000)
b. Advise based on Maximin criterion:
On using maximin criterion, the alternative with the lowest loss is selected. It is more of an pessimistic strategy in which an alternative providing the best of the worst payoff is opted for. Following table represents the payoff under maximin criterion per alternative which is then aggregated for the final outcome –
Action Alternatives
High
Moderate
Low
Failure
Maximin Criterion (Min)
Overhaul
10,000
15,000
10,000
-55,000
-55,000
Expand
70,000
30,000
15,000
-75,000
-75,000
Buy
60,000
20,000
25,000
-65,000
-65,000
Do Nothing
4,000
3,000
2,000
-6,000
-6,000
Maximin outcome = Max of {-55,000 -75,000 -65,000 -6,000} =
-6,000
Thus, the optimal line of action to be taken is:
Limit production to the current plant capacity with an expectation of failure (Cell with payoff -6,000)
Action Alternatives
High
Moderate
Low
Failure
Overhaul
10,000
15,000
10,000
-55,000
Expand
70,000
30,000
15,000
-75,000
Buy
60,000
20,000
25,000
-65,000
Do Nothing
4,000
3,000
2,000
-6,000
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