The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars).
The state-of-nature probabilities are P(s1) = .35, P(s2) = .35, and P(s3) = .30.
a. Use a decision tree to recommend a decision.b. Use EVPI to determine whether Gorman should attempt to obtain abetter estimate of demand.c. A test market study of the potential demand for the product is expectedto report either a favorable (F) or unfavorable (U) condition. The relevantconditional probabilities are as follows:
What is the probability that the market research report will be favorable?d. What is Gorman's optimal decision strategy?e. What is the expected value of the market research information?
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