A manufacturer of dishware is considering modernizing

QUESTION

2. CAPACITY PLANNING.

A manufacturer
of dishware is considering modernizing its current manufacturing facility which
makes the most popular line of dishware. The modernization of the facility will
dramatically decrease the manufacturing cost for large production volumes.

The annual
demand for this line of dishware along with its probability distribution is
given in Table 1 (column 1 and 2 respectively). The current variable
manufacturing cost per each unit produced varies according to the demand volume
(as given in column 3 of Table 1). Each
unit is sold for $35 per unit. The existing facility has annual fixed operating
cost of $200,000.

After
modernization, the manufacturing facility will require higher annual fixed
operating cost of $240,000. Variable manufacturing cost per units will change
according to the last column in Table 1 (notice that it is considerably lower
for the higher demand volumes).

Demand
(units per year)

Probability

Current variable cost ($
per unit)

New Variable cost ($ per
unit)

8,000

0.5

7.75

9.40

10,000

0.2

5.00

5.20

15,000

0.2

5.40

3.80

20,000

0.1

7.50

4.90

Table
1.

Should
the company modernize its current facility based on the annual net expected
profits?

3. DECISION ANALYSIS.

A company is deciding whether or not to go
ahead with a project. If the project is
successful, the company will make $500,000 profit. If the project fails, the company’s net loss
will be $250,000. The probability of the
projects success is 0.5.

a) If perfect information about
the success or failure of this project was available, how much would this
information be worth?

The company occasionally hires consultant
to update their estimates of success/failure.
Consultant predicts either success or failure for the project; in either
case the company must decide whether or not to go ahead with the project. The company is considering hiring Harry who
charges $10,000 for his services.

The probability of Harry predicting success
is 0.5. The following probabilities were determined based on Harrys previous
predictions:

P(project succeeds when Harry predicts
success) = 0.8
P(project fails when Harry predicts
failure) = 0.8

b) Should Harry be hired? If
yes, what is the value of his prediction to the company?

ANSWER

CLICK HERE TO GET AN EXPERT SOLUTION TO THE QUESTION