The research and development will cost $25,000, and there is a 0.4 probability that it will be successful. If it is successful, then the fixed setup cost, which is $250,000 per batch will be reduced by $200,000 to $50,000. If the research and development is not successful, then there will be no reduction in the setup cost. There will be no other benefits from the research and development besides the potential reduction in setup cost for the Samsung reorder.
1. What is the expected profit if Emerson undertakes the research and development? 2.
2. Using expected profit as a decision criterion, determine the value of learning for certain whether the research and development will be successful before a decision has to be made about whether to initially manufacture 100,000 or 200,000 PC boards.
3.Determine the range of P[s1] for which the best alternative is the R&D option.
Problem 6.2 (Research and development): For the problem in the preceding question, Emerson Manufacturing has created a new option: It can conduct some research and development to attempt to lower the fixed setup cost associated with manufacturing a batch of the PC boards. This research and development would not be completed in time to influence the setup cost for the initial batch that Samsung has ordered, but would be completed before the second batch would have to be manufactured. The research and development will cost $25,000, and there is a 0.4 probability that it will be successful. If it is successful, then the fixed setup cost per batch will be reduced by $200,000 to $50,000. If the research and development is not successful, then there will be no reduction in the setup cost. There will be no other benefits from the research and development besides the potential reduction in setup cost for the Samsung reorder. (6 points) (a) What is the expected profit if Emerson undertakes the research and development? (b) Using expected profit as a decision criterion, determine the value of learning for certain whether the research and development will be successful before a decision has to be made about whether to initially manufacture 100,000 or 200,000 PC boards. (c) Determine the range of P[si] for which the best alternative is the R&D option. Problem 6.2 (Research and development): For the problem in the preceding question, Emerson Manufacturing has created a new option: It can conduct some research and development to attempt to lower the fixed setup cost associated with manufacturing a batch of the PC boards. This research and development would not be completed in time to influence the setup cost for the initial batch that Samsung has ordered, but would be completed before the second batch would have to be manufactured. The research and development will cost $25,000, and there is a 0.4 probability that it will be successful. If it is successful, then the fixed setup cost per batch will be reduced by $200,000 to $50,000. If the research and development is not successful, then there will be no reduction in the setup cost. There will be no other benefits from the research and development besides the potential reduction in setup cost for the Samsung reorder. (6 points) (a) What is the expected profit if Emerson undertakes the research and development? (b) Using expected profit as a decision criterion, determine the value of learning for certain whether the research and development will be successful before a decision has to be made about whether to initially manufacture 100,000 or 200,000 PC boards. (c) Determine the range of P[si] for which the best alternative is the R&D option
