Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier.

The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is
dependent on the demand for the product. The following payoff table shows the projected profit (in thousands of dollars):
The state-of-nature probabilities are P(s1)=0.35,P(s2)=0.35, and P(s3)=0.30. Do not round your intermediate calculations.
(a) Use a decision tree to recommend a decision.
(b) Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand. Enter your answer in thousands of dollars. For example, an answer of $200 thousands shou
be entered as 200,000.
Gorman
attempt to obtain a better estimate of demand, as the additional information could be worth up to $
for Gorman.
(c) A test market study of the potential demand for the product is expected to report either a favorable (F) or an unfavorable (U) condition. The relevant conditional probabilities are as follows
P(F|s1)=0.10,P(U|s1)=0.90
P(F|s2)=0.40,P(U|s2)=0.60
P(F|s3)=0.60,P(U|s3)=0.40
What is the probability that the market research report will be favorable? [Hint: We can find this value by summing the joint probability values as follows: P(F)=P(Fs1)+P(Fs2)+
P(F3)=P(s1)P(F|s1)+P(s2)P(F|s2)+P(s3)P(F|s3).] If required, round your answer to three decimal places.
(d) What is Gorman's optimal decision strategy? Choose the correct option.
A. Conduct test market, and manufacture component part, regardless of the market research report
B. Conduct test market, and purchase component part, regardless of the market research report
C. Conduct test market, and manufacture component part if market is favorable, or purchase component part if market is unfavorable
D. Do not conduct test market, and purchase component part
E. Do not conduct test market, and manufacture component part
(e) What is the expected value of the market research information? Enter your answer in thousands of dollars. For example, an answer of $200 thousands should be entered as 200,000. If your answer is zero, enter 0.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Performance

Authors: Marc Bertoneche, Rory Knight

1st Edition

0750640111, 978-0750640114

More Books

Students also viewed these Finance questions