A manufacturer wants to introduce a new product family. The demand for the product family is...
A manufacturer wants to introduce a new product family. The demand for the product family is somewhat predictable. The manufacturer can choose among the following three types of processes to produce the new products: Process A, Process B, and Process C. Demand can be classified into three states: Low, Moderate, and High.
The table below summarizes the payoffs (in $1,000s) associated with each process/demand combination, as well as the probabilities of each possible demand state.
|
Low (20%) |
Moderate (50%) |
High (30%) |
|
|
Process A |
- $10,000 |
$20,000 | $50,000 |
|
Process B |
-$20,000 | $30,000 | $80,000 |
|
Process C |
-$40,000 | $30,000 | $100,000 |
(a) Calculate the EMVs for each of the three alternatives.
(b) What is the EVwPI in this case?
(c) How much would the manufacturer be willing to pay for a forecast that would accurately determine the demand level in the future? Hint: It is the EVPI.
Homework Answers
The process diagram is as follows:
The EMVs are calculated as follows:
The EVwPI and EVPI are calculated as follows:
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