Question

3-29 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 ocation. 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 deman and 5D% for high demand. DEMAND IS LOW DEMAND IS MEDIUM DEMAND IS HIGH Ardmore, OK 85 110 150 Sweetwater, TX 90 100 140 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?

Answer 1

a) Determine the best possible payoff, and choose the alternative with that payoff.

OK = 150

TX = 140

LA = 130

Ans - OK

b) Determine the worst possible payoff for each alternative, and choose the
alternative that has the “best worst.”

OK = 85

TX = 90

LA = 110

Ans - LA

c) Determine the worst regret for each alternative, and choose the alternative with the “best worst.” To do
this, subtract every payoff in each column from the best payoff in that column. The second step is to identify the worst regret for each alternative

	Low	Med	High
OK	25	10	0
TX	20	20	10
LA	0	0	20

OK - 25

TX - 20

LA - 20

Ans - TX & LA either can be chosen

d) Minimize cost - It will be basis the weighted average of demand and value for each option:

OK = 85*20% + 110*30% + 150*50% = 125

TX = 90*20% + 100*30% + 140*50% = 118

LA = 110*20% + 120*30% +130*50% = 123

Hence, OK is the best