Question 1

ABC Sdn Bhd produces Product 123 for customers in the construction industry. This Product 123 is able to generate RM160 per unit of contribution to the company. Recently, ABC Sdn Bhd has been having some problems with its manufacturing process for Product 123. Under the current manufacturing process, 25% of the products are defective.

If a customer finds Product 123 to be defective, ABC Sdn Bhd will refund RM240 for each Product 123. The customer will then repair the product to make it usable for their construction work.

Therefore, before delivering the product to its customers, ABC Sdn Bhd will spend an additional RM120 per unit of Product 123 to rework any units thought to be defective. This amount will be spent regardless of whether the product really is defective. The reworked products can be sold at the regular selling price and will definitely not be defective in the constructors projects.

Unfortunately, ABC Sdn Bhd cannot tell ahead of time which units will fail to work in their constructors work, but would not want to deliver a product where tests had revealed a problem.

Required:

b) In the market, there is a test that could evaluate the condition of the product and this test promises a hundred percent accuracy. Therefore, ABC Sdn Bhd is considering whether the company should engage such testing services before making the decision to deliver its product as it is or rework it first. Calculate the following expected value:

EV (Profits) if a test is engaged =	RM
EV (Profits) if a test is not engaged =