A small parts manufacturer has just engineered a new product for the automotive industry.In order to produce the part the company can expand existing facilities,acquire a competitor,or subcontract production.The company believes the product will either experience high market demand or low market demand,with probabilities of 0.6 and 0.4,respectively.The following payoff table describes the company's decision situation.

The best decision according to the expected value criterion is:
A)Acquire Competitor
B)Expand Facilities
C)Subcontract Production
D)High Demand

Question

A small parts manufacturer has just engineered a new product for the automotive industry.In order to produce the part the company can expand existing facilities,acquire a competitor,or subcontract production.The company believes the product will either experience high market demand or low market demand,with probabilities of 0.6 and 0.4,respectively.The following payoff table describes the company's decision situation.

The best decision according to the expected value criterion is:

The best decision according to the expected value criterion is:
A)Acquire Competitor 
B)Expand Facilities 
C)Subcontract Production 
D)High Demand

Quizplus · Accepted Answer

To make the decision, we calculate the expected values for each of the alternatives and choose the one with the highest expected value.

Expected value of expanding facilities:
(0.6 x 800) + (0.4 x 150) = 510

Expected value of acquiring competitor:
(0.6 x 600) + (0.4 x (-50)) = 350

Expected value of subcontracting production:
(0.6 x 400) + (0.4 x 200) = 320

Expected value of high market demand:
(0.6 x 1000) + (0.4 x 500) = 700

Therefore, the best decision according to the expected value criterion is to expand facilities.

A Small Parts Manufacturer Has Just Engineered a New Product