Reference no: EM132855712

A medical equipment manufacturer must decide whether to manufacture a new component in-house, or purchase it from an external supplier, or do neither. Their success will depend on the severity of the second wave of an impending pandemic. Experts have predicted that there is a 0.58 chance that the second wave will be severe and a 0.42 chance that it will be mild. If the second wave is severe, the company will earn $0.77 million in profits if they manufacture, and $0.22 million if they purchase. If the second wave is mild, the company will lose $175,000 if they manufacture but still earn $78,000 in profits if they purchase.

a) Make the decision tree below that best represents this decision problem.

b) What is the optimal expected monetary value of this decision?

c) Based on expected values, what is the best decision for this company?

-Choose mild
-Manufacture
-Purchase
-Do nothing
-Manufacture or Purchase
-Choose severe