Dana Meseroll, President of Graphic Corportation, has signed a $1,050,000 contract to deliver and install sophisticated detection system called G-LAN to a major shipbuilding corporation. Graphic has built a variety of versions of the G-LAN system before. Although the quality of the G-LAN system is quite good, site-specific installation problems still persist. The likelihood that the G-LAN system will perform up to specifications depends very much on engineering characteristics at the installation site.

Using normal production techniques, Graphic can produce and install the G-LAN for $600,000. However, if they took every possible precaution , they could build and install a G-LAN that would be just about perfect, at a cost of $720,000.

If Graphic installed the G-LAN built the normal way, there is an 8% chance that it would not perform up to specifications. It would then have t be shipped back to the Graphic's plant, rebuilt for an additional $150,000, and then sent back and reinstalled at the shipbuilder's site. The shipping and re-installation costs would be an additional $210,000. If the G-LAN is rebuilt. it will be done so as to guarantee that it will work free of defects.

Dana Meseroll has asked George Waitt, division head for test and evaluation, to look into the possibility of pre-testing the circuits in the G-LAN before it is sent out to the shipbuilder. According to George, such a test costs about $20,000. The output of the test is a rating of "positive", "neutral" and "negative". If the G-LAN is all right (it will perform up t0 specifications) then chance that it will test positive is 70%, neutral 20% and negative 10%. If the G-LAN is not all right then the chance that it will test negative is 75%, neutral 10% and positive 15%.

Dana Meseroll thought things over. She felt very uneasy about the possibility of installing the G-LAN, having it not perform up to specifications and suffering the embarrassment of having to rebuild it. She guessed that this embarrassment could cost the company around $100,000 in lost goodwill, reputation and effects on future earnings.

If you were Dana Meseroll, what decision strategy would you recommend?