Question
The XY Manufacturing Company must decide whether to manufacture a component part at its plant or purchase the component part from a supplier. The resulting
The XY Manufacturing Company must decide whether to manufacture a component part at its plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in ten thousand of pesos):
State of Nature | |||
Low demand, s1 | Medium demand, s2 | High demand, s3 | |
Manufacture, d1 | -100 | 200 | 500 |
Manufacture d2 | 50 | 225 | 350 |
The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30.
a. Use a decision tree to recommend a decision. b. Use EVPI to determine whether XY Manufacturing Company should attempt to obtain a better estimate of demand. c. A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows:
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