Sox Engineering designs and constructs air conditioning and heating (HVAC) syste
ID: 397881 • Letter: S
Question
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 77 weeks. The penalty for completing the design late is $15 comma 00015,000 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 $12 comma 00012,000 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 comma 00092,000 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 $56 comma 00056,000. Sox would then complete the rest of the design and control systems at an estimated cost of $32 comma 00032,000. 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
On Time
One Week Late
Two Weeks Late
Three Weeks Late
Internal Engineers
0.30.3
0.40.4
0.30.3
—
External Engineers
0.20.2
0.30.3
0.40.4
0.10.1
Joint Design
0.10.1
0.20.2
0.40.4
0.30.3
The expected monetary value using inside engineers to complete the design is
$
The expected monetary value using an outside engineering firm to complete the design is
$
The expected monetary value of conducting a joint design is
$
What is the best decision based on an expected monetary value criterion?
a. External engineering firm
b. Joint design
c. Internal engineers
Probability of Completing the Design
Option
On Time
One Week Late
Two Weeks Late
Three Weeks Late
Internal Engineers
0.30.3
0.40.4
0.30.3
—
External Engineers
0.20.2
0.30.3
0.40.4
0.10.1
Joint Design
0.10.1
0.20.2
0.40.4
0.30.3
Explanation / Answer
Prob Total Weeks 7 8 9 10 Option On Time One Week Late Two Weeks Late Three Weeks Late Late OT/Week Cost On time One Week Late Two Weeks Late Three Weeks Late EV = Cost * Prob Internal Engineers 0.3 0.4 0.3 — 15000 12000 84000 111000 138000 165000 111000 External Engineers 0.2 0.3 0.4 0.1 15000 92000 92000 107000 122000 137000 113000 Joint Design 0.1 0.2 0.4 0.3 15000 56000 32000 88000 88000 103000 118000 133000 116500 The expected monetary value using inside engineers to complete the design is 111000 The expected monetary value using an outside engineering firm to complete the design is 113000 The expected monetary value of conducting a joint design is 116500 What is the best decision based on an expected monetary value criterion? c. Internal engineers Minimum cost of EV
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