Reference no: EM132903832
Question - A toy manufacturer makes stuffed kittens and puppies which have relatively lifelike motions. There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. Payoffs for each mechanism-demand combination appear in the table below.
|
Alternatives
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State of Nature
|
|
Light
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Moderate
|
Heavy
|
|
Wind-up action
|
500,000
|
800,000
|
1,300,000
|
|
Pneumatic action
|
180,000
|
880,000
|
1,480,000
|
|
Electronic action
|
-200,000
|
800,000
|
1,560,000
|
a) If Maximax strategy were used, which alternative would be chosen?
b) Assuming a Maximin strategy, which alternative would be chosen?
c) Assuming a Minimax Regret strategy, which alternative would be chosen?
d) If the states of nature were equally likely (Laplace Criterion), which alternative should be chosen?
e) Assume that the manufacturer has in hand a forecast of demand that suggests a 0.25 probability of light demand, a 0.4 probability of moderate demand, and a probability of 0.35 of heavy demand. Using the criterion of expected monetary value, which production alternative should be chosen?
f) How much should the operations manager be willing to pay for accurate information (i.e. what is the Expected Value of Perfect Information, EVPI?)?