Reference no: EM132324089

Question 1: Ritz Products's materials manager, Bruce Elwell, nest determine whether to make or buy a new semiconductor for the wrist TV that the firm is about to produce. One million units are expected to be produced over the life cycle. If the product is made, start-up and production costs of the make decision total $1 million, With a probability of 0.4 that the product will be satisfactory and a 0.6 probability that it will not. If the product is not satisfactory, the firm will have to reevaluate the decision. If the decision is reevaluated, the choice will be whether to spend another $1 million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.9. If the second make decision also fails, the firm must purchase. Regardless of when the purchase takes place, Elwell's best judgment of cost is that Ritz will pay $0.50 for each purchased semiconductor plus $1 million in vendor devel- opment cost.

a) Assuming that Ritz must have the semiconductor (stopping Of doing without is not a viable option), what is the best decision?

b) What criteria did you use to make this decision?

c) What is the worst that can happen to Ritz as a result of this particular decision? What is the best that can happen?

Question 2: Page Engineering designs and constructs air conditioning and heating systems for hospitals and clinics. Currently, the company's staff is overloaded with design work. There is a major design project due in eight weeks. The penalty for completing the design late is $14 000 per week, since any delay will cause the facility to open later than anticipated, and cost the client significant revenue. If the company uses its inside engineers to complete the design, it will have to pay them overtime for all work. Page has estimated that it will cost $12 000 per week (wages and overhead), including late weeks, to have company engineers complete the design. Page is also considering having an outside engineering firm do the design.

A bid of $92 000 has been received for the completed design. Yet another option for completing the design is to conduct a joint design by having a third engineering company complete all electromechanical components of the design at a cost of $56 000. Page would then complete the rest of the design and control systems at an estimated cost of $30 000.

Page has estimated the following probabilities of completing the project within various time frames when using each of the three options. Those estimates are shown in the following table:

What is the best decision based on an expected monetary value criterion? (Note: You want the lowest EMV because we are dealing with costs in this problem.)

Question 3: McBurger, Inc., wants to redesign its kitchens to improve productivity and quality. Three designs, called designs K1, K2, and K3, are under consideration. No matter which design is used, daily demand for sandwiches at a typical McBurger restaurant is for 5(X) sandwiches. A sandwich costs $1.30 to produce.

Non-defective sandwiches sell, on the average, for $2.50 per sandwich. Defective sandwiches cannot be sold and are scrapped. The goal is to choose a design that maximizes the expected profit at a typical restaurant over a 300-day period. Designs Kl, K2, and K3 cost $100 000, $130 000, and $180 000 respectively. Under design K1, there is a 0.80 chance that 90 out of each 100 sandwiches are non-defective and a 0.20 chance that 70 out of each 100 sandwiches are non-defective. Under design K2, there is a 0.85 chance that 90 out of each 100 sandwiches are non-defective and a 0.15 chance that 75 out of each 100 sandwiches are non-defective. Under design K3, there is a 0.90 chance that 95 out of each 100 sandwiches are non-defective and a 0.10 chance that 80 out of each 100 sandwiches are non-defective. What is the expected profit level of the design that achieves the maximum expected 300-day profit level?