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, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company's decision situation. The expected value for the subcontract production decision is
A) $250,000
B) $160,000
C) $700,000
D) $1,200,000

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, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company's decision situation.  The expected value for the subcontract production decision is
A) $250,000 
B) $160,000 
C) $700,000 
D) $1,200,000

Quizplus · Accepted Answer

To find the expected value for the subcontract production decision, multiply the payoffs by their respective probabilities and then sum them up:

Expected value = (0.6 x $200,000) + (0.4 x $120,000) = $120,000 + $48,000 = $168,000

Therefore, the best choice based on expected value is to subcontract production, with an expected value of $168,000, which is the highest among the three options.