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Assignment # 3

1. A newly formed firm must decide on a plant location. There are two
alternatives under consideration: locate near the major raw materials or
locate near the major customers. Revenue per unit will be $185 in either
case. Using the following information, determine which location would
produce the greater profit.
Near the raw Near the
materials market
Annual fixed costs ($ millions) $1.20 $1.40
Variable cost per unit $36 $47
Expected annual demand (units) 8,000 12,000

2. A small producer of machine tools wants to move to a larger building, and
has identified two alternatives.
 Location A has annual fixed costs of $800,000 and variable costs of
$14,000 per unit.
 Location B has annual fixed costs of $920,000 and variable costs of
$13,000 per unit.
 The finished items sell for $17,000 each.
a. At what volume of output would the two locations have the same total
cost?
b. For what range of output would location A be superior? For what range
would B be superior?

3. Using the following factor ratings, determine which location alternative (A,
B, or C) should be chosen on the basis of maximum composite score.
Factor (100 points each) Weight A B C
Convenience 0.15 80 70 60
Parking facilities 0.2 72 76 92
Display area 0.18 88 90 90
Shopper traffic 0.27 94 86 80
Operating costs 0.1 98 90 82
Neighborhood 0.1 96 85 75

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4. A company that handles hazardous waste wants to minimize the shipping
cost for shipments to a disposal center from five receiving stations it
operates. Given the locations of the receiving stations and the volumes to be
shipped daily, determine the location of the disposal center.
Receiving Location Volume
stations x y (ton per day)
A 10 5 26
B 4 1 9
C 4 7 25
D 2 6 30
E 8 7 40

5. A small building contractor has recently experienced two successive years in
which work opportunities exceeded the firm’s capacity. The contractor must
now make a decision on capacity for next year. Estimated profits under each
of the two possible states of nature are as follows …
NEXT YEAR'S DEMAND
Alternative Low High
Do nothing $50 * $60
Expand 20 80
Subcontract 40 70
* Profit in $ thousands.
 Which alternative should be selected if the decision criterion is …
a. Maximax?
b. Maximin?
c. Laplace?
d. Minimax regret?

6. Suppose, for the previous problem, that the probabilities of low and high
demand are … P (low) = 0.3 and P (high) = 0.7.
a. Determine the expected profit of each alternative. Which alternative is
best? Why?
b. Analyze the problem using a decision tree. Show the expected profit of
each alternative on the tree.

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7. Determine the course of action that has the highest expected payoff for this
decision tree.

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