Question

6. 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 $5,000) with a cost of $22 per unit; and (c) on an entirely new assembly line (costing $20,000) 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 10,000 units the first year. With competition, the number of units sold is expected to drop to 6,000. At the moment, their best estimate is that there is a 60% chance of competition. They have decided to make their decision based on the first-year sales. (a) Develop a decision table (EOL) Rresent lind oueraukd lin Naw line b) What decision should they make?

Answer 1

A.

Decision table are as follows:

Alternatives	No Competition	Competition
Present Assembly Line	250000	150000
Overhauled Line	225000	137000
New Assembly line	220000	140000
Probability	0.4	0.6

B.

The best decision is to go with the new assembly line as it has lowest expected value of  total cost.

Alternatives	No Competition	Competition	Expected value of cost
Present Assembly Line	250000	150000	190000
Overhauled Line	225000	137000	172200
New Assembly line	220000	140000	172000
Probability	0.4	0.6