The product design group of Iyengar Electric Supplies,Inc., has determined that it needs to design a new series of switches.It must decide on one of three design strategies. The market forecastis for 200,000 units. The better and more sophisticated the designstrategy and the more time spent on value engineering, the less willbe the variable cost. The chief of engineering design, Dr. W. L.Berry, has decided that the following costs are a good estimate of theinitial and variable costs connected with each of the three strategies:a) Low-tech: A low-technology, low-cost process consisting ofhiring several new junior engineers. This option has a fixedcost of $45,000 and variable-cost probabilities of .3 for $.55each, .4 for $.50, and .3 for $.45.b) Subcontract: A medium-cost approach using a good outsidedesign staff. This approach would have a fixed cost of $65,000and variable-cost probabilities of .7 of $.45, .2 of $.40, and .1 of $.35.c) High-tech: A high-technology approach using the very best of the inside staff and the latest computer-aided design technol-ogy. This approach has a fixed cost of $75,000 and variable-cost probabilities of .9 of $.40 and .1 of $.35. What is the best decision based on an expected monetary value(EMV) criterion? ( Note: We want the lowest EMV, as we aredealing with costs in this problem.)
The product design group of Iyengar Electric Supplies,
Inc., has determined that it needs to design a new series of switches.
It must decide on one of three design strategies. The market forecast
is for 200,000 units. The better and more sophisticated the design
strategy and the more time spent on value engineering, the less will
be the variable cost. The chief of engineering design, Dr. W. L.
Berry, has decided that the following costs are a good estimate of the
initial and variable costs connected with each of the three strategies:
a) Low-tech: A low-technology, low-cost process consisting of
hiring several new junior engineers. This option has a fixed
cost of $45,000 and variable-cost probabilities of .3 for $.55
each, .4 for $.50, and .3 for $.45.
b) Subcontract: A medium-cost approach using a good outside
design staff. This approach would have a fixed cost of $65,000
and variable-cost probabilities of .7 of $.45, .2 of $.40, and .1 of $.35.
c) High-tech: A high-technology approach using the very best of
the inside staff and the latest computer-aided design technol-
ogy. This approach has a fixed cost of $75,000 and variable-
cost probabilities of .9 of $.40 and .1 of $.35.
What is the best decision based on an expected monetary value
(EMV) criterion? ( Note: We want the lowest EMV, as we are
dealing with costs in this problem.)
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