# B yes allen should pay 110004 90004 90002 900 80

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b. Yes, Allen should pay [1,100(0.4) + 900(0.4) + 900(0.2)] – 900 = \$80.
Problem 4 Today's Electronics specializes in manufacturing modern electronic components. It also builds the equipment that produces the components. Phyllis Weinberger, who is responsible for advising the president of Today's Electronics on electronic manufacturing equipment, has developed the following table concerning a proposed facility: PROFIT (\$) STRONG MARKET FAIR MARKET POOR MARKET Large facility 550,000 110,000 -310,000 Medium-sized facility 300,000 129,000 -100,000 Small facility 200,000 100,000 -32,000 No facility 0 0 (a) Develop an opportunity loss table. (b) What is the minimax regret decision? 0
3 Strong Fair Poor Max. Market Market Market Regret Large 0 19,000 310,000 310,000 Medium 250,000 0 100,000 250,000 Small 350,000 29,000 32,000 350,000 None 550,000 129,000 0 550,000 b. Minimax regret decision is to build medium.
4 Problem 5 Mick Karra is the manager of MCZ Drilling Products, which produces a variety of specialty valves for oil field equipment. Recent activity in the oil fields has caused demand to increase drastically, and a decision has been made to open a new manufacturing facility. Three locations are being considered, and the size of the facility would not be the same in each location. Thus, overtime might be necessary at times. The following table gives the total monthly cost (in \$1,000s) for each possible location under each demand possibility. The probabilities for the demand levels have been determined to be 20% for low demand, 30% for medium demand, and 50% for high demand. DEMAND IS LOW DEMAND IS MEDIUM DEMAND IS HIGH Ardmore, OK 85 110 150 Sweetwater, TX 90 100 120 Lake Charles, LA 110 120 130 (a) Which location would be selected based on the optimistic criterion? (b) Which location would be selected based on the pessimistic criterion? (c) Which location would be selected based on the minimax regret criterion? (d) Which location should be selected to minimize the expected cost of operation? (e) How much is a perfect forecast of the demand worth? (f) Which location would minimize the expected opportunity loss? (g) What is the expected value of perfect information in this situation? The costs in the table are in 1,000s. Demand Optimistic Pessimistic EMV Alternatives Low Medium High Best Cost (Lowest) Worst Cost (Highest) Expected Cost Ardmore 85 110 150 85 150 125 Sweetwater 90 100 120 90 120 108 Lake Charles 110 120 130 110 130 123 Probability 0.2 0.3 0.5
5 Demand Minimax Regret Alternatives Low Medium High Maximum EOL Ardmore 0 10 30 30 18 Sweetwater 5 0 0 5 1 Lake Charles 25 20 10 25 16 Probability 0.2 0.3 0.5 The minimax regret decision is to choose Sweetwater. It has a maximum regret of 5, which is lower than the other maximums. d. The decision based on the lowest expected cost of operation (EMV) is to choose Sweetwater. This yields an expected cost of 108 as seen in the payoff table.