Kallie Inc., 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. The following payoff table describes the company's decision situation. The regret that is associated with the decision to acquire competitor when demand is low is
A) $0.
B) $525,000.
C) $1,250,000.
D) $1,275,000.

Question

Kallie Inc., 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. The following payoff table describes the company's decision situation.  The regret that is associated with the decision to acquire competitor when demand is low is
A) $0. 
B) $525,000. 
C) $1,250,000. 
D) $1,275,000.

Quizplus · Accepted Answer

To find the regret for acquiring competitor when demand is low, we need to compare the payoff for acquiring competitor when demand is low, which is $1,200,000, with the maximum payoff in the same column, which is $675,000 for subcontracting. The regret is the difference between the two, which is $525,000. Since this is the highest regret value in the table, the best decision would be to choose the option with the lowest regret, which is expanding facilities when demand is high, or acquiring competitor when demand is high.