The XY Manufacturing Company must decide whether to manufacture acomponent part at its 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 ten thousand of pesos):
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The XY Manufacturing Company must decide whether to manufacture acomponent part at its 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 ten thousand of pesos):
| State of Nature | State of Nature | State of Nature | |
| Decision Alternative | Low Demand S_(1) |
Medium Demand S_(2) |
High Demand S_(3) |
| Manufacture, d_(1) | -100 | 200 | 500 |
| Purchase, d_(2) | 50 | 225 | 350 |
The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3
) = 0.30.
a. Use a decision tree to recommend a decision.
b. Use EVPI to determine whether XY Manufacturing Company should attempt to obtain a better estimate of demand.
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