Essentials of Business Analytics 1st Edition by Jeffrey Camm,James Cochran,Michael Fry,Jeffrey Ohlmann ,David Anderson

Exercise 26

The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars):

The state-of-nature probabilities are P ( s 1 ) = 0.35, P ( s 2 ) = 0.35, and P ( s 3 ) = 0.30.
a. Use a decision tree to recommend a decision.
b. Use EVPI to determine whether gorman should attempt to obtain a better estimate of demand.
c. A test market study of the potential demand for the product is expected to report either a favorable ( F ) or unfavorable ( u ) condition. The relevant conditional probabilities are as follows:

What is the probability that the market research report will be favorable
d. What is gorman's optimal decision strategy
e. What is the expected value of the market research information