New machine for making parts for domestic appliances

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Reference no: EM13966851

Lars Van Hoek is about to install a new machine for making parts for domestic appliances. Three suppliers have made bids to supply the machine. The first supplier offers the Basicor machine, which automatically produces parts of acceptable, but not outstanding, quality. The output from the machine varies (depending on the materials used and a variety of settings) and might be 1,000 a week (with probability 0.1), 2,000 a week (with probability 0.7) or 3,000 a week. The net profit for the machine is $4 a unit. The second supplier offers a Supertamp machine, which makes higher quality parts. The output from this might be 700 a week (with probability 0.4) or 1,000 a week, with a net profit of $10 a unit. The third supplier offers the Switchover machine, which managers can set to produce either 1,300 high-quality parts a week at a profit of $6 a unit, or 1,600 medium-quality parts a week with a profit of $5 a unit. If the machine produces 2,000 or more units a week, Lars can export all production as a single bulk order. Then there is a 60% chance of selling this order for 50% more profit, and a 40% chance of selling for 50% less profit. What should Lars do to maximize the expected profit?

Reference no: EM13966851

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