Explore BrainMass
Share

# Make decision based on an expected monetary value criterion

The product design group of Flores Electric Supplies, Inc., has determined that it needs to design a new series of switches. It must decide on one of three design strategies. The market forecast is for 200,000 units. The better and more sophisticated the design strategy and the more time spent on value engineering, the less will be the variable cost. The chief of engineering design, Dr. W. L. Berry, has decided that the following costs are a good estimate of the initial and variable costs connected with each of the three strategies:
a) Low-tech: a low-technology, low-cost process consisting of hiring several new junior engineers . This option has a fixed cost of \$45,000 and variable-cost probabilities of .3 for \$.55 each, .4 for \$.50 for \$.45.
b) Subcontract: a medium-cost approach using a good outside design staff. This approach would have a fixed cost of \$65.000 and variable-cost probabilities of .7 of \$.\$45, .2 of \$.40, and .1 of .\$35.
c)High-tech: a high technology approach using the very best of the inside staff and the latest computer-aided design technology. This approach has a fixed cost of \$75,000 and variable-cost probabilities of .9 os \$.40 and .1 of \$.35.
What is the best decision based on an expected monetary value (EMV) criterion?
(Note: we want the lowest EMV, as we are dealing with costs in this problem.)

#### Solution Preview

Strategy a:
Cost=fixed cost+expected variable ...

\$2.19