A Toy Manufacturer Has Three Different Mechanisms That Can Be

Essay

A toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the dolls is dependent on the volume of sales. The anticipated payoffs are as follows.
$$\begin{array} { | l | c | c | c | } \hline & \text { Light Demand } & \begin{array} { c } \text { Moderate } \\\text { Demand }\end{array} & \text { Heavy Demand } \\\hline \text { Probability } & 0.25 & 0.45 & 0.3 \\\hline \text { Wind-up action } & \$ 325,000 & \$ 190,000 & \$ 170,000 \\\hline \text { Pneumatic action } & \$ 300,000 & \$ 420,000 & \$ 400,000 \\\hline \text { Electrical action } & - \$ 400,000 & \$ 240,000 & \$ 800,000 \\\hline\end{array}$$
a. What is the EMV of each decision alternative?
b. Which action should be selected?
c. What is the expected value with perfect information?
d. What is the expected value of perfect information?