The product design group of ABC Supplies has determined that it needs to design a new series of electric switches. It must decide on one of three design strategies. 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. Berry, has decided that the following costs are a good estimate of the initial and variable costs connected with each of three strategies: ·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 of $0.52 each.
·Subcontract: a medium-cost approach using a good outside design staff. This approach would have a fixed cost of $55,000 and variable cost of $0.45.
·High-tech: a high technology approach using the very best of the inside staff and the latest computer-aided design (CAD) technology. This approach has a fixed cost of $85,000 and variable cost of $0.40.
nDr Berry also estimated that the market forecast for the new series of switches may be different with the following probabilities:
·200,000 units with probability of 0.3
·180,000 units with probability of 0.5
·160,000 units with probability of 0.2.
The price per unit is planned to be $0.99.
Dr. Berry would like to identify the best decision based on the an expected monetary value (EMV) criterion
1. Draw a decision tree for this problem. Identify payoffs, and put them on the decision tree.
2. Calculate EMVs, identify and present the best solution. Show your calculations