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 100,000 units at $550 each, with a probability of .6, and a .4 probability of 75,000 at $550. If, however, he uses the value analysis team (option b), the firm expects sales of 75,000 units at $750, with a probability of .7, and a .3 probability of 70,000 units at $750. Value analysis, at a cost of $100,000, is only used in option b. Which option has the highest expected monetary value (EMV)?

Explanation / Answer

The expected monetary value of option A

EMVA = 0.6 X [ 100,000 units X $ 550 ] + 0.4 [ 75,000 units X $ 550 ]

EMVA = $ 49,500,000

EMVB = 0.7 [ 75,000X$750 ] + 0.3 [ 70,000 units X $ 750 ] - $ 100,000

EMVB = $ 55,025,000

Option B has the highest expected monetary value .

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