Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The Plastic Production Company needs to expand its production capacity. This can be done in one of two ways: using overtime in its current
The Plastic Production Company needs to expand its production capacity. This can be done in one of two ways: using overtime in its current plant or leasing another plant. Overtime has a cost penalty (above regular time) of $3 per case of product produced, and can only be used for up to 15,000 cases per year. Leasing another plant would entail an annual fixed leasing cost of $25,000. however, the work force of this plant would be paid on a regular-time basis and could produce any number of cases up to a maximum of 20,000 cases annually. The company estimates that additional demand (beyond what can be produced in its current plant in regular time) may take on the following values, with corresponding probabilities: Additional Demand (cases per year) 5,000 10,000 15.000 Probabilities 0.3 0.5 0.2 a. Draw a decision tree for this problem, and find the optimal decision to minimize expected cost. b. Suppose a market research company offers to perform a survey to determine the exact quantity of additional demand that will be forthcoming. Should the company be willing to pay $1,000 for such a perfect survey? Why or why not? (Use EVPI to justify your answer) c. What is the expected opportunity loss (EOL) of the best decision in (a)?
Step by Step Solution
★★★★★
3.44 Rating (151 Votes )
There are 3 Steps involved in it
Step: 1
a Decision tree and optimal decision to minimize expected cost 003 Expand Pr...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started