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):
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.
c. A test market study of the potential demand for the product is expected to report
either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows:
What is the probability that the market research report will be favorable?
d. What is XY Manufacturing Company optimal decision strategy?
e. What is the
f. What is the efficiency of the information?
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