Question
An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equipment purchase price, installation,
An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equipment purchase price, installation, and initial spare parts. The variable costs per unit for each level of automation are primarily labor related.
| Alternative | Fixed Costs | Variable Costs per Unit |
| A | $100,000 | $49 |
| B | $300,000 | $36 |
| C | $500,000 | $24 |
| D | $600,000 | $18 |
We now have some additional information that can help us make a better decision. The selling price of each unit is $143. Based on past sales data, marketing has projected that the probabilities of future demand levels are:
| Future Demand (units) | Probability |
| 5,000 | 0.33 |
| 10,000 | 0.14 |
| 15,000 | 0.25 |
| 20,000 | 0.28 |
What is the expected value of Option A?
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An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equipment purchase price, installation, and initial spare parts. The variable costs per unit for each level of automation are primarily labor related.
| Alternative | Fixed Costs | Variable Costs per Unit |
| A | $100,000 | $49 |
| B | $300,000 | $36 |
| C | $500,000 | $24 |
| D | $600,000 | $18 |
We now have some additional information that can help us make a better decision. The selling price of each unit is $126. Based on past sales data, marketing has projected that the probabilities of future demand levels are:
| Future Demand (units) | Probability |
| 5,000 | 0.33 |
| 10,000 | 0.14 |
| 15,000 | 0.25 |
| 20,000 | 0.28 |
What is the expected value of Option B?
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equipment purchase price, installation, and initial spare parts. The variable costs per unit for each level of automation are primarily labor related.
| Alternative | Fixed Costs | Variable Costs per Unit |
| A | $100,000 | $49 |
| B | $300,000 | $36 |
| C | $500,000 | $24 |
| D | $600,000 | $18 |
We now have some additional information that can help us make a better decision. The selling price of each unit is $104. Based on past sales data, marketing has projected that the probabilities of future demand levels are:
| Future Demand (units) | Probability |
| 5,000 | 0.33 |
| 10,000 | 0.14 |
| 15,000 | 0.25 |
| 20,000 | 0.28 |
What is the expected value of Option C?
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equipment purchase price, installation, and initial spare parts. The variable costs per unit for each level of automation are primarily labor related.
| Alternative | Fixed Costs | Variable Costs per Unit |
| A | $100,000 | $49 |
| B | $300,000 | $36 |
| C | $500,000 | $24 |
| D | $600,000 | $18 |
We now have some additional information that can help us make a better decision. The selling price of each unit is $106. Based on past sales data, marketing has projected that the probabilities of future demand levels are:
| Future Demand (units) | Probability |
| 5,000 | 0.33 |
| 10,000 | 0.14 |
| 15,000 | 0.25 |
| 20,000 | 0.28 |
What is the expected value of Option D?
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Operations Management Sustainability and Supply Chain Management
Authors: Jay Heizer, Barry Render, Paul Griffin
2nd Canadian edition
978-0133764345
