v10 EXAMPLE 9.8-7 XYZ company manufactures parts for passanger cars and sells them in lots of 10,000 parts each. The company has the policy of inspecting each lot before it is shipped to the customer Five inspection ratings established for quality control represent the percentage of defective items contained in each lot. The management is considering two possible courses of action : (0) Shut down the entire plant operations and thoroughly inspect each machine. This action costs 600. (ii) Continue production but offer the customer a refund of Re. I for each defective item that is detected and returned. Rating Proportion of defective items Frequency Excellent (A) 0.02 25 Good (B) 0.05 30 Acceptable (C) 0.10 20 Fair (D) 0.75 20 Poor (E) 0.20 5 What is the optimum decision for the company ? Also find the EI PI. [M.S Baroda MBA. 1995)