Suppose that the probabilities of the three scenarios are estimated to be 0.15, 0.40, and 0.45, respectively.
Question:
Suppose that the probabilities of the three scenarios are estimated to be 0.15, 0.40, and 0.45, respectively. Find the best expected value decision.
The DoorCo Corporation is a leading manufacturer of garage doors. All doors are manufactured in their plant in Carmel, Indiana, and shipped to distribution centers or major customers. DoorCo recently acquired another manufacturer of garage doors, Wisconsin Door, and is considering moving its wood door operations to the Wisconsin plant. Key considerations in this decision are the transportation, labor, and production costs at the two plants. Complicating matters is the fact that marketing is predicting a decline in the demand for wood doors. The company developed three scenarios:
1. Demand falls slightly, with no noticeable effect on production.
2. Demand and production decline 20%. 3. Demand and production decline 40%. The following table shows the total costs under each decision and scenario.
1. Demand falls slightly, with no noticeable effect on production.
2. Demand and production decline 20%. 3. Demand and production decline 40%. The following table shows the total costs under each decision and scenario.
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