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You have been asked to determine the financial risks of manufacturing 100,000 units of a new product in factory A or factory B. Below are

You have been asked to determine the financial risks of manufacturing 100,000 units of a new product in factory A or factory B. Below are the cost per unit for each of the production facilities as well as the one-time setup cost for each facility. Factory A is already set up therefore the one-time setup cost for factory A is listed as $0. Cost per unit factory A: $2.30 One-time setup factory A: $0.00 Cost per unit factory B: $2.20 One-time setup factory B: $30,000.00 Your manufacturing personnel inform you that due to the old setup of factory A it is likely that some of the product may be contaminated, as shown below: % defective 0 1 2 3 4 Probability of 40 30 15 10 5 occurrence (%) Contaminated items must be removed and replaced at a cost of $18/contaminated unit. However, 100% of units produced at factory B are guaranteed contamination-free. Construct a payoff table, and using the expected-value model, determine the financial risk and advise the directors which option is best. Explain your answer. Would your answer change under complete uncertainty?

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