Question

Question 1

East Van (EV) Distillery is a small boutique distillery that produces hand-craft batches of a number of different types of spirits. One of East Van’s most popular products is its high end home-made vodka. Each month EV must decide how many batches of their vodka to produce to match demand without producing too much. Excess vodka that cannot be sold by the end of the month depreciates in quality to the point that EV will not sell it to its customers. EV has reviewed its past production and demand history and determined that the following:

# of batches sold/month 1 2 3 4 5 6 7 8

Probability 0.02 0.04 .05 0.15 0.17 .28 0.18 0.11 The cost to produce a “batch” is $1500, and the revenue that EV makes on each batch is approximately $4900. EV will produce its vodka batches within the first few days of each month and any vodka not sold by the end of the month is sold to a local restaurant for $100 per batch (due to spoilage) to use

in cooking. EV knows that not meeting customer demand is detrimental to its future business as competition in the “micro-distillery” business is fierce. EV estimates a cost of $750 (due to loss of future sales, goodwill, etc.) for every batch demanded by his customers that they cannot supply.

Assuming EV’s demand and costing information above is accurate, answer the following questions by developing a spreadsheet model using Excel:

2. Construct a payoff matrix in Excel. You do not have to create complex formulas to do this! You should realize that using simple calculations (+, - , *, etc) will easily suffice for creating the payoff table. Copy and paste your payoff table from Excel into your Word document as a picture per the guidelines on page 5.

4. What decision should he make according to the maximax decision rule?

6. What decision should he make according to the maximin decision rule?

8. What decision should he make according to the EMV decision rule?

10. What decision should he make according to the minimax regret decision rule?

12. What decision should he make according to the EOL decision rule?

14. Which of the above decision crierion would you recommend? State WHY you would recommend this criterion.

16. How much should EV be willing to pay to obtain a demand forecast for their vodka batches that is 100% accurate?