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MODULE A

DISCUSSION QUESTIONS
4. EMV is defined as the expected monetary value. The EMV is the expected or average return that we would realize if we were to repeat the decision an infinite number of times. Expected value under certainty is the expected or average return that we would realize if we were to repeat the decision an infinite number of times, each time having perfect or complete information and making the best possible decision based on that information. EVPI is defined as the expected value of perfect information. EVPI is equal to the difference between EMV (the expected or average return given that we were to make the decision based on current or available information) and expected value under certainty and is the maximum amount we would be willing to pay for additional (perhaps, perfect) information. Determination of EVPI is useful any time the manager has the option of expending additional resources to acquire additional information and making the decision using currently available information. Maximax is the optimistic criterion. It maximizes the maximum outcome. Maximin is the pessimistic criterion. It maximizes the minimum outcome.

9. 10.

END-OF-MODULE PROBLEMS
A.1
Alternatives Large plant Small plant Overtime Do nothing Very Favorable Market \$275,000 \$200,000 \$100,000 \$0 Average Market \$100,000 \$60,000 \$40,000 \$0

States of Nature
Unfavorable Market \$150,000 \$10,000 \$1,000 \$0 Row Minimum 150,000 10,000 1,000 Row Maximum Row Average 75,000

275,000
200,000 100,000 0 maximax

83,333
46,333 0 equally likely

0
maximin

Large plant Do nothing Small plant

Market Size of First Station

Small Medium Large Very large

Row Row Minimum Maximum 10,000 50,000 20,000 80,000 40,000 100,000 160,000 300,000
maximin

(b)

1

(c) (d) A.3

Maximin decision: small station Equally likely decision: very large station

EMV (large stock) 0.322 + 0.512 + 0.22 12.2 EMV (average stock) 0.314 0.510 0.26 10.4 EMV (small stock) 0.39 0.58 0.24 7.5 Maximum EMV is large stock \$12,200 EVPI \$13,800 12,200 \$1,600 where: \$13,800 0.322 + 0.512 + 0.26 EMV (assembly line) 0.4\$10,000 0.6\$40,000 \$28,000 EMV (new plant) 0.4\$100,000 0.6\$600,000 \$320,000 EMV (nothing) 0 Select the new plant option. EVPI \$364,000 \$320,000 \$44,000 (a) EMV (Alt. 1) 0.480 0.3120 0.3140 32 36 42 110 max. EMV EMV (Alt. 2) 0.490 0.390 0.390 36 27 27 90 EMV (Alt. 3) 0.450 0.370 0.3150 20 21 45 86 EVPI 117 110 7
\$60 + 250 + 210 \$520 Expected cost of part-timer 0.2 0 + 0.5350 + 0.31,000 \$0 + 175 + 300 \$475

A.4 A.5

A.6 A.7

(b) A.8

Expected cost of hiring full-timer 0.2300 + 0.5500 + 0.3 700

Thus, use part-time lawyers. A.9 Large has EMV = \$75,000 ; Small has EMV = \$83,333 ; Overtime EMV = \$46,333 ; and Do nothing EMV \$0 . Small plant is best decision.

A.10 EMV (major expansion) 150,000* EMV (minor expansion) 50,000 EMV (do nothing) 0 * Therefore, the company should do the major expansion. A.11 (a) Demand 11 Cases P 0.45 385
385 56 329

Stock

13 cases

385 112 273

420 56 364

455

\$341.25

The recommended course of action, based on the expected monetary value criterion, is to stock 11 cases.

Instructors Solutions Manual t/a Operations Management

(b)

It should be intuitively obvious that if no loss due to overstocking is involved, one should always carry the maximum stock. This observation is confirmed by the following table. Demand 11 Cases P 0.45 385 385 385 Demand 12 Cases P 0.35 385 420 420 Demand 13 Cases P 0.20 385 420 455

*

EMV \$385.00 \$404.25 \$411.25

A.12 Profit from each case sold: \$95 \$45 \$50 . Loss from each case produced but not sold: \$45. Demand (Cases) 7 8 P 0.3 P 0.5 300 300 350 350

The recommended course of action, based on the expected monetary value criterion, is to stock the maximum of 13 cases.

Production (Cases) 6 7

6 P 0.1 300
300 45 255 300 90 210 300 135 165

400

400

\$352.50

400 45 355

450

\$317.00

A.13 Note: All dollar values in 1,000s

Build \$155 Pilot works (0.5) \$155 Do not build \$72.5 Try pilot Pilot fails (0.5) \$10 Do not build Decide now \$10 \$0 \$0 Do not build Work (0.4) \$80 Fail (0.6) \$90 Build \$90 Work (0.2) \$38 Fail (0.8) \$128 200 10 190 150 10 160 10 \$200 Work (0.9) \$171 Fail (0.1) \$16 200 10 190 150 10 160 10

\$150

\$0

The recommended strategy (EMV = 72.5) is Try pilot If pilot is success: build plant If pilot is failure: do not build plant Note: All costs/revenues have been entered at the end of the branches of the tree. Although this procedure is not required in this example due to an implicit assumption of linear utility, it is required when using a more general representation of utility.

A.14 Note: All dollar values are in 1,000s. (a)

Build large 20 Favorable (0.4) \$160 \$20 Unfavorable (0.6) \$180 300 400

80

10

Favorable (0.4) \$0 Do not build 0 \$0 Unfavorable (0.6) \$0

(b) (c)

Based on the expected monetary value criterion, Penny should elect to build a small plant. We can find the EVPI from the following: Expected value under certainty = (0.4) (400,000) + 0.6 (0) = \$160,000 Maximum EMV = \$26,000 EVPI = \$160,000 \$26,000 = \$134,000
1% Defective (0.7) Buy from A 90 90 3% Defective (0.2) 5% Defective (0.1) 1% Defective (0.3) 3% Defective (0.4) 5% Defective (0.3) 50 150 250 50 150 250

A.15 (a)

(b)

A.17 Note: All dollar values are in 1,000s. (a)

Build large Stable 85 Grow 150

60

45

Grow Do not build Stable

(b) Build large wing Build small wing Do not build (c) Build large wing Build small wing Do not build

Population Trend Growth Stable 150 85 60 45 0 0 Population Trend Growth P 0.5 Stable P 0.5 150 85 60 45 0 0

EMV \$32.50 \$7.50 \$0.00

Based on the expected monetary value criterion with the assumption that the states of nature are equally likely, she should build the large wing. (d) Build large wing Build small wing Do not build Population Trend Growth P 0.6 Stable P 0.4 150 85 60 45 0 0

EMV \$56.00 \$18.00 \$0.00

Based on the expected monetary value criterion, she should build the large wing.

Instructors Solutions Manual t/a Operations Management

A.18

Favorable Small shop Unfavorable Favorable Survey says favorable Large shop Unfavorable No shop Use survey Small shop Unfavorable Favorable Survey says unfavorable Large shop Unfavorable No shop Favorable Small shop Unfavorable Favorable Decide now Large shop Unfavorable No shop Favorable

Quantitative Module A: Decision-Making Tools

A.19
Small shop

Favorable (0.9) \$21 Unfavorable (0.1) Favorable (0.9) \$45 Unfavorable (0.1)

30 5 = 25 10 5 = 15 60 5 = 55 40 5 = 45 0 5 = 5

Survey says favorable market (0.6) +\$45

Large shop

No shop Use survey \$25 \$25 Favorable (0.12) \$10.2 Unfavorable (0.88) Favorable (0.12) \$33 Unfavorable (0.88)

Small shop

30 5 = 25 10 5 = 15 60 5 = 55 40 5 = 45 0 5 = 5

Survey says unfavorable market (0.4) \$5

Large shop

No shop Favorable (0.5) \$10 Unfavorable (0.5) Favorable (0.5) \$10 Unfavorable (0.5)

Small shop

30 10 60 40 0

Decide now \$10

Large shop

No shop

The optimal strategy is to use the survey. If the survey indicates a favorable market, then build a large shop. If the survey does not indicate a favorable market, then do nothing.

A.20

8,500

(0.9) (0.1)

500

(0.9) (0.1)

9,000

(0.4) (0.6)

7,000

(0.4) (0.6)

4,500

(0.7) (0.3)

15000 20000 5000 10000 0

500

(0.7) (0.3)

Your advice should be to not gather additional information and to build a large video section. A.21 (a)
Major 10,000 Minor
10,000 5,000

100,000 90,000 40,000 20,000 0

(b)

EMV (major renovation) 5,000 EMV (minor renovation) 10,000* * best decision is minor renovation

Quantitative Module A: Decision-Making Tools

A.22
Small 20,000

Good (1/3) Fair (1/3) Poor (1/3) Good (1/3) Medium 30,000 Poor (1/3) 55,000 Good (1/3) Large 30,000 Poor (1/3) Good (1/3) Very large 55,000 Poor (1/3) Fair (1/3) Fair (1/3) Fair (1/3)

50,000 20,000 10,000 80,000 30,000 20,000 100,000 30,000 40,000 300,000 25,000 160,000

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