Question

A toy manufacturer makes stuffed idttens and puppies that have relatively lifelike motions. There are three different mechanisms which can be installed in these pets. These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. The manufacturer has in hand a forecast of demand that sugpests a 0.2 probability of light demand, a 0.45 probability of moderate demand, and a probability of 0,35 of heavy demand. Payoffs for each mechanism demand combination appear in the table below. Demand Ught Moderate Heavy Wind-up action $250,000 $400,000 $650,000 Pneumatic $90,000 $440,000 $740,000 Electronic -$100,000 $400,000 $780.000 2. What is the EMV for the Wind Up option! Select b. What is the EMV for the Pneumatic option? Select What is the EMV for the Electronic option? Select d. Based on EMV what choice should be made? Select

Answer 1

Probability of Light demand = 0.2

Probability of Moderate Demand = 0.45

Probability of Heavy Demand = 0.35

Question – a:

EMV of Wind-Up Action:

Sum total of payoffs*probability of demand status or level

= 0.2*250000 + 0.45*400000 + 0.35*650000

= 457500

Answer is: 457500

Question – b:

EMV of Pneumatic:

= 0.2*90000 + 0.45*440000 + 0.35*740000

= 475000

Answer is: 475000

Question – c:

EMV of Electronic

= 0.2*(-100000) + 0.45*400000 + 0.35*780000

= 433000

Answer is: 433000

Question – d:

Option with maximum EMV is preferred.

Answer is: Pneumatic

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