Expected total cost by choosing to postpone shipping

Reference no: EM131105941

Sharp Outfits is trying to decide whether to ship some customer orders now via UPS or wait until after the threat of another UPS strike is over. If Sharp Outfits decides to ship the requested merchandise now and the UPS strike takes place, the company will incur $60,000 in delay and shipping costs. If Sharp Outfits decides to ship the customer orders via UPS and no strike occurs, the company will incur $4000 in shipping costs. If Sharp Outfits decides to postpone shipping its customer orders via UPS, the company will incur $10,000 in delay costs regardless of whether UPS goes on strike. Let p represent the probability that UPS will go on strike and impact Sharp Outfits's shipments.

a. For which values of p, if any, does Sharp Outfits minimize its expected total cost by choosing to postpone shipping its customer orders via UPS?

b. Suppose now that, at a cost of $1000, Sharp Outfits can purchase information regarding the likelihood of a UPS strike in the near future. Based on similar strike threats in the past, the company assesses that if there will be a strike, the information will predict a strike with probability 0.75, and if there will not be a strike, the information will predict no strike with probability 0.85. Provided that p = 0.15, what strategy should Sharp Outfits pursue to minimize its expected total cost?

c. Use the tree from part b to find the EVSI when p = 0.15. Then use a data table to find EVSI for p from 0.05 to 0.30 in increments of 0.05, and chart EVSI versus p.

d. Continuing part b, compute and interpret the EVPI when p = 0.15.

Reference no: EM131105941

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