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 110,000 units at $580 each, with a probability of 0.75 and a 0.25 probability of 70,000 at $580. If, however, he uses the value analysis team (option b), the firm expects sales of 90,000 units at $700, with a probability of 0.61 and a 0.39 probability of 70,000 units at $700. Value engineering, at a cost of $120,000, is only used in option b. Which option has the highest expected monetary value (EMV)? The EMV or option a s$ and the EMV or option bis $ Therefore, option has the highest expected monetary value. Enter your responses as integers

Explanation / Answer

EMV for any option = Sum of ( Expected sales quantity x Price per unit x Probability )- Cost ( if any)

Thus.

EMV for option a ( $) = 110,000 x 580 x 0.75 + 70,000 x 580 x 0.25 = 47850000 + 10150000 = $58000000

EMV for option b = 90,000 x 700 x 0.61 + 70000 x 700 x 0.39 - 120,000 = 38430000 + 19110000 – 120,000 = $ 57420000

THE EMV FOR OPTION A IS $58000000

THE EMV FOR OPTION B IS 57420000

THEREFORE OPTION A HAS THE HIGHEST EXPECTED MONETARY VALUE

THE EMV FOR OPTION A IS $58000000

THE EMV FOR OPTION B IS 57420000

THEREFORE OPTION A HAS THE HIGHEST EXPECTED MONETARY VALUE

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