Benha University IND301_Advanced Operations Research

Faculty of Engineering at Shoubra Assignment #4 1st term 2022/23 (231)

Industrial Engineering Program Subject: Decision Theory
[1] The research department of Hindustan Lever has recommended to the marketing
department to launch a shampoo of three different types. The marketing manager has to
decide one of the types of shampoo to be launched under the following estimated pay offs for
visions levels of sales
Estimated level of sales (units)
Types of Shampoo
15,000 10,000 5,000
Egg. Shampoo 30 10 10
Clinic Shampoo 40 15 5
Delux Shampoo 55 20 3
What will be the marketing managing decision of i) MaxiMin ii) MiniMin iii)MaxiMax iv)
Laplace and v) Regret criterion is applied.

[2] Consider the following payoff (profit) matrix

S1 S2 S3 S4
Alt1 5 10 18 25
Alt2 8 7 8 23
Alt3 21 18 12 21
Alt4 30 22 19 15
Solve by using (i) Harwich criterion with α=0.73, (ii) Savage criterion

[3] The demand for a seasonal product is given below

Demand 40 45 50 55 60 65
Probability 0.1 0.2 0.3 0.25 0.1 0.05
The product cost $60/unit and sells at $80/unit. If the units are not sold within the season,
they will have no market value.
a) Determine the optimum number of units to be produced.
b) Calculate EVPI

[4] A small industry finds from the past data that the cost of making an item is $55, the
selling price of the item is $80 if it is sold within a week, and it could be disposed off at $45
per item at the end of the week if unsold. Probability of weekly sales is given below.
Weekly sales 40 50 60 70
Probability 0.15 0.20 0.40 0.25
Find the optimum number of items per week the industry should make.

[5] A company has recently installed new machinery but has not yet decided on the
appropriate number of a certain spare part required for repairs. Spare parts cost $2000 each
but are only available if ordered now. If the plant failed and there was no spare part
available, the cost to the business of mending the plant rises to $15,000. The plant has an
estimated life of 10 years and the probability distribution failures during this time, based on
the experience with similar plant, is as follows:
Dr. Sayed Ali Zayan 1
 No. of failures over 10 yrs period 0 1 2 3 4 5 and over
probability 0.1 0.4 0.3 0.1 0.1 Nil
Calculate:
a) The expected No. of failures in the ten-year period.
b) The optimal No. of spares that should be purchased now.
c) The cost of ordering policy chosen.
d) The value of perfect information of the number of failures in ten-year life.

[6] ABC Ltd. has invented a picture cell phone. It is faced with selecting one alternative out
of the following strategies:
a) Manufacture the cell phone
b) Take royalty from another manufacturer
c) Sell the rights for the invention and take a lump sum amount
Profit in thousands of $ which can be incurred and the probability associated with such
alternative are shown in the table below:
Event probability Manufacturer Royalty Sell rights
High 0.25 200 60 50
Medium 0.4 50 40 50
Low 0.35 -10 20 50
Represent the company problem in the form of the decision tree and suggest what decision
the company should take to maximize profits.

[7] A farmer is not sure whether he should dig a tube well in his field. He is presently using
the canal water for irrigation of his fields for which he pays $5000/year. The history of tube
well digging in the village has not been very encouraging, only 50% of the wells dug up to
200 feet yielded water. Some farmers drilled further up to 300 feet but only 25% of them
struck water at 300 feet. The cost of drilling is $100/feet. The farmer has to make the
following three decisions:
a) Shall he drill up to 200 feet?
b) If no water is store at 200 ft. should he drill up to 300 feet?
c) Should he continue to buy water from government for next 5 years, as the life of the
tube well is only five years?
Draw a decision tree diagram and find the best strategy for the farmer.

[8] A large steel manufacturing company has three options with regard to production (1)
produce commercially (2) build pilot plant (3) stop producing steel. The management has
estimated that their pilot plant, if built, has 0.8 chance of high yield and 0.2 chance of low
yield. If the pilot plant does show a high yield, management assigns a probability of 0.75 that
the commercial plant will also have a high yield. If the pilot plant shows a low yield, there is
only a 0.1 chance that the commercial plant will show a high yield. Finally, management’s
best assessment of the yield on a commercial-size plant without building a pilot plant first
has a 0.6 chance of high yield. A pilot plant will cost $300,000. The profits earned under
high and low yield conditions are $12,000,000 and - $1,200,000 respectively. Find the
optimum decision for the company, by using decision tree.

Dr. Sayed Ali Zayan 2