MacDonald Products, Inc., of Clarkson, New York, has the option of (a) proceedin

Falak Kinney

Falak Kinney

Answered question

2021-10-03

MacDonald Products, Inc., of Clarkson, New York, has the option of (a) proceeding immediately with production of a new top-of-the-line stereo TV that has just completed prototype testing or (b) having the value analysis team complete a study. If Ed Lusk, VP for operations, proceeds with the existing prototype (option a), the firm can expect sales to be 100,000 units at $550 each, with a probability of 6, and a.4 probability of 75,000 at $550. If, however, he uses the value analysis team (option b), the firm expects sales of 75,000 units at $750, with a probability of .7, and a.3 probability of 70,000 units at $750. Value analysis, at a cost of $100,000, is only used in option b. Which option has the highest expected monetary value (EMV)?

Answer & Explanation

Nathanael Webber

Nathanael Webber

Skilled2021-10-04Added 117 answers

As per given above:
Option A:
Probability(c)Priceperunit(p)No.ofunit(n)n×p×c0.65501000033000000.45507500016500000Expectedmonetaryvalue19800000
Option A:
Probability(c)Priceperunit(p)No.ofunit(n)n×p×c0.775075000393750000.37507000015750000Totalvalue55125000
Less: Value engineering cost: 100000
Expected monetary value = Total value-Value engineering cost
Expected monetary value =55125000100000
Expected monetary value =$55025000
Thus, the option B has the highest Expected monetary value.

star233

star233

Skilled2023-05-13Added 403 answers

To solve this problem, we need to calculate the expected monetary value (EMV) for both options and compare them.
Let's start by calculating the EMV for option (a), which is proceeding immediately with production of the new top-of-the-line stereo TV prototype.
The sales for option (a) are as follows:
- 100,000 units at 550 with a probability of 0.6
- 75,000 units at 550 with a probability of 0.4
The expected sales revenue for option (a) can be calculated as:
E(a)=(100,000×550×0.6)+(75,000×550×0.4)
Next, let's calculate the EMV for option (b), which involves using the value analysis team.
The sales for option (b) are as follows:
- 75,000 units at 750 with a probability of 0.7
- 70,000 units at 750 with a probability of 0.3
However, we also need to subtract the cost of the value analysis team, which is 100,000.
The expected sales revenue for option (b) can be calculated as:
E(b)=(75,000×750×0.7)+(70,000×750×0.3)100,000
Now, we can compare the EMV for both options:
If E(a)>E(b), then option (a) has the highest EMV.
If E(b)>E(a), then option (b) has the highest EMV.
Let's calculate the EMVs and compare them:
E(a)=(100,000×550×0.6)+(75,000×550×0.4)=33,000,000
E(b)=(75,000×750×0.7)+(70,000×750×0.3)100,000=39,750,000100,000=39,650,000
Comparing E(a) and E(b), we find that E(b)>E(a). Therefore, option (b) has the highest expected monetary value (EMV).
Hence, option (b), which involves using the value analysis team, has the highest expected monetary value (EMV).

Do you have a similar question?

Recalculate according to your conditions!

New Questions in Multivariable calculus

Ask your question.
Get an expert answer.

Let our experts help you. Answer in as fast as 15 minutes.

Didn't find what you were looking for?