Question

Barbour Electric is considering the introduction of a new product. This product can be produced in one of several ways: (a) using the present assembly line at a cost of $25 per unit, (b) using the current assembly line after it has been overhauled (at a cost of $10,000) with a cost of $12 per unit; and (c) on an entirely new assembly line (costing $30,000) designed especially for the new product with a per unit cost of $20. Barbour is worried, however, about the impact of competition. If no competition occurs, they expect to sell 15,000 units the first year. With competition, the number of units sold is expected to drop to 9,000. At the moment, their best estimate is that there is a 40% chance of competition. They have decided to make their decision based on the first year sales. Construct the payoff table (do NOT use a decision tree) (3 points)

Answer 1

Payoff table

Expected Monetary Value (EMV)

Alternative NoCompensat Compensation EMV

P=0.60. P=0.40

Present line. 375000 . 225000 . 31500

Overhauled . 340000 . 208000 . 287000

New line . 330000 . 210000 . 282000

Expected Opportunity Loss (EOL)

Alternative NoCompensat .Compensation. EOL

P=0.60. P=0.40

Present line. 45000. 17000. 33800

Overheadline. 10000. 50. 6000

New line 0 . 2000 . 800

The owner should decide to build a new line.