Chung Manufacture is considering the introduction of a family of new product. Long-term demand for the product group is somewhat predictable, so the manufacture must be concerned with the risk of choosing a process that is inappropriate. Chen Chung is VP of operations. He can choose among batch manufacturing or custom manufacturing, or he can invest in group technology. Chen won't be able to forecast demand accurately until after he makes the process choice. Demand will be classified into four compartments: poor, fair, good and excellent. The table below indicates the payoffs (profits) associated with each process/demand combination, as well as the probabilities of each long-term demand level:

State of Nature (Possible Future Demand)

Alternatives Poor (0.1) Fair (0.4) Good (0.3) Excellent (0.2)

Batch -200,000 1,000,000 1,200,000 1,300,000

Custom 100,000 300,000 700,000 800,000

Group Technology -1,000,000 -500,000 500,000 2,000,000

1.Based on expected value, what choice offers the greatest gain?

2.What would Chen Chung be willing to pay for a forecast that would accurately determine the level of demand in the future?

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