Expected Monetary Value
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A production manager is trying to decide whether to hire an experienced worker, a new inexperienced worker or stick with the existing team. With benefits, the experienced worker would cost $50,000 per year and the new worker $25,000. The current team can produce 10,000 units of product a year. She estimates the experienced worker would allow the team to increase production 20%. With the inexperienced worker there is a 50% chance that production capacity would be increased 10% and a 50% chance it would be increased 20%. The marketing department forecasts a 20% chance of annual demand being 10,000 units, a 50% chance of demand being 11,000 units and a 30% chance of demand being 12,000 units. Given current costs, the company makes $25 on every unit sold. The manager is comfortable using a one year time horizon for performing the analysis. .
a. Set up and solve the decision tree to determine the best actions and Expected Monetary Value of that decision.
b. For $100 the prospective new employee can be given a skills test to help determine their likely productivity. Historically, 60% of new employees would be able to increase output 20% in their first year and 40% increase output 10%. If the new employee would increase output 20% there is a 70% chance he would score "High" on the test and a 30% chance of scoring "Average". If he would only increase output 10% there is a 20% chance of scoring "High" on the test and an 80% chance of scoring "Average". Should the prospective new employee be given the test?
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Solution Summary
Units of production with experienced workers are clearly ascertained in this tutorial.
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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