Exam 16: Supplement A Decision Making

Use the following information to answer the questions below. You currently make a part for old equipment at a cost of $20 / unit. The annual fixed cost for this equipment is $50,000. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year (see table). -Refer to the instruction above. What does the company save for the year by selecting the low-cost option (for annual requirements of 40,000 units)?

A manufacturing firm is considering an entirely new product that will require additional capital equipment, training, and an addition to their existing facility that will cost $50,000 per year. The projected retail price is $45 per unit, and the variable cost of production is $12.50. What is the break-even for this product? Solve using both the graphical and algebraic approaches.

A "Little Sis" restaurant has been opened as a prototype to test the concept of a smaller facility with a limited menu. Experience during the first two years was as follows: The average sale is $10 per customer. Use the following partially completed graph to determine the break-even quantity graphically. Then refine your solution by solving it algebraically.

Under what conditions can decision trees be useful?

Commodore is debating whether to produce the printed circuit boards for a new line of video cameras or outsource their production to a company that specializes in this operation. Strictly from a cost standpoint, production of the circuit boards would definitely be outsourced if:

Which condition would result in invalidating an application of break-even analysis?

Table A.2 Use the following to answer the questions below. A company that is introducing a new product has to choose between four different manufacturing methods, referred to as methods A, B, C and D. Depending on the demand for the product, they forecast different levels of expenses for the year (values are in thousands). The company has identified three possible states of nature for economic growth, and named them High, Medium, and Low. -Using the information in Table A.2, which alternative is best in accordance with a decision criterion of Laplace?

The Laplace criterion will reach the same decision as the Minimax Regret criterion when the payoff table contains expenses instead of revenues.

When using decision tree analysis:

A marketing director must decide among four alternatives for a new marketing campaign. She ascertains that the probability of high demand is 0.8 and the probability of low demand is 0.2. What is the best choice with the payoffs shown in the tree?

A new minor league baseball team is coming to town and the owners have decided to build a new stadium, either small or large. The success of the team with regard to ticket sales will be either high or low with probabilities of 0.75 and 0.25, respectively. If demand for tickets is high, the large stadium would provide a payoff of approximately $20 million. If ticket sales are low, the loss on the large stadium would be $5 million. If a small stadium is constructed, and ticket sales are low, the payoff is $500,000 after deducting the cost of construction. If ticket sales are high, the team can choose to build an upper deck, or to maintain the existing facility. Expanding the stadium in this scenario has a payoff of $10 million, whereas maintaining the same number of seats has a payoff of only $3 million. a. Draw a decision tree for this problem. b. What should management do to achieve the highest expected payoff?

Zipco is in serious negotiations to purchase a chunking machine that will enable them to perform their own chunking at $1 per unit. They currently have their chunking outsourced at a cost of $1.50 per unit and a fixed cost of $45,000. Their marketing team feels that they can sustain an annual volume of 10,000 units. What is the maximum fixed cost that Zipco should be willing to bear in order to perform their own chunking?

Use the following information to answer the questions below. You currently make a part for old equipment at a cost of $20 / unit. The annual fixed cost for this equipment is $50,000. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year (see table). -Refer to the instruction above. What are total costs to buy an annual quantity of 40,000 units?

The site selection team you formed last quarter meets with you in the conference room to present the results of their thoughtful analysis. They have collectively logged 200,000 frequent flyer miles while conducting their investigation. The conference room table sags under the weight of their massive report and all team members sport deep tans. As the leader drones on about their completely objective approach to the problem he projects a slide containing the following information about their location of choice. What questions do you, a conscientious vice-president level executive, have for the team about this portion of their analysis?

What is the total cost if the beekeeper keeps 8 hives?

A manufacturing firm is considering whether to produce or outsource the production of a new product. If they produce the item themselves, they will incur a fixed cost of $950,000 per year, but if they outsource overseas there will be a $1.5 million cost per year. The advantage of outsourcing overseas is the variable cost of 95¢ per unit, which is a fraction of their $43/unit cost in their own union shop. Regardless of where these devices are made, they will sell for $98 each. What is the break-even quantity for each alternative? Solve this problem graphically and algebraically.

Analyze the following decision tree. Determine the missing probabilities, and identify the alternative that maximizes the expected payoff.

A payoff table shows the amount for each alternative if each possible event occurs.

Sensitivity analysis is a technique for systematically changing parameters in a model to determine the effects of such changes.

A(n) ________ is a schematic model of alternatives available to the decision maker, along with their possible consequences.