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A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier.
A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars). State of Nature Decision Alternative Low $1 Medium Demand Demand Demand $2 $3 High Manufacture, d -10 50 110 Purchase, d 20 55 80 - The state-of-nature probabilities are P(s) 0.35, P(s2)=0.35, and P(S3) = 0.30. (a) Use a decision tree to recommend a decision. The best decision is to manufacture the component part. (b) Use EVPI to determine whether the company should attempt to obtain a better estimate of demand, assuming the estimate would come at no further cost. EVPI-9 The EVPI suggests that the company should consider an attempt to obtain a better estimate of demand. (c) A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows:
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