Motorking Corporation, a market leader in the production of specialized engine additives, is considering introducing a new "gas extender" product. This product is added to an automobile’s gasoline to extend mileage and reduce exhasut emissions. Motorking's manufacturing facility can produce 50,000 cases of the new product per year with a set-up cost of $100,000. The average variable cost per case would be $5. Large orders, (i.e., above 50,000 cases) will be subcontracted to a local refining company. Motorking has signed a secrecy agreement with the vendor that guards the basic process. The variable cost per case, if the new product is produced outside, is $9. Whether the product is manufactured by Motorking or by the vendor, there is a $12 per case cost for marketing and overhead. Motorking's production manager is considering three production levels for the new product: 50,000 cases, 75,000 cases, and 100,000 cases. The level of sales will depend on the state of the economy. Sales estimates prepared by the marketing manager indicate that if the economy is strong then Motorking will sell 100,000 cases, if the economy is moderate they will sell 70,000 cases, and if the economy is weak they will sell only 40,000 cases. The marketing department forecasts that there is a 45 percent chance of a strong market and a 20 percent of a weak market. A case of the new product is priced to sell at $39.95. Unsold units will be sold at a clearance sale with a 55 percent discount. Before deciding on a method and level of production, the production manager wishes to evaluate the possibility of hiring a local market research firm to conduct a survey. The manager has received a proposal from Decision Systems Inc. (DSI). DSI proposes to conduct the survey for $20,000. In the past, DSI has demonstrated the following performance: Correctly predicted a strong economy 10 out of 15 times (three times they predicted a moderate economy and two times a weak economy). Correctly predicted a moderate economy 7 out of 10 times (two times they predicted a strong economy and one time a weak economy). Correctly predicted a weak economy 5 out of 6 times (one time they predicted a moderate economy). The production manager wishes to know:   3)  What is the probability that the economy will be weak given a forecast by DSI that the economy will be weak? What is the probability that DSI will predict a strong economy?

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
icon
Related questions
icon
Concept explainers
Topic Video
Question

Motorking Corporation, a market leader in the production of specialized engine additives, is considering introducing a new "gas extender" product. This product is added to an automobile’s gasoline to extend mileage and reduce exhasut emissions. Motorking's manufacturing facility can produce 50,000 cases of the new product per year with a set-up cost of $100,000. The average variable cost per case would be $5. Large orders, (i.e., above 50,000 cases) will be subcontracted to a local refining company. Motorking has signed a secrecy agreement with the vendor that guards the basic process. The variable cost per case, if the new product is produced outside, is $9. Whether the product is manufactured by Motorking or by the vendor, there is a $12 per case cost for marketing and overhead.

Motorking's production manager is considering three production levels for the new product: 50,000 cases, 75,000 cases, and 100,000 cases. The level of sales will depend on the state of the economy. Sales estimates prepared by the marketing manager indicate that if the economy is strong then Motorking will sell 100,000 cases, if the economy is moderate they will sell 70,000 cases, and if the economy is weak they will sell only 40,000 cases. The marketing department forecasts that there is a 45 percent chance of a strong market and a 20 percent of a weak market.

A case of the new product is priced to sell at $39.95. Unsold units will be sold at a clearance sale with a 55 percent discount. Before deciding on a method and level of production, the production manager wishes to evaluate the possibility of hiring a local market research firm to conduct a survey. The manager has received a proposal from Decision Systems Inc. (DSI). DSI proposes to conduct the survey for $20,000. In the past, DSI has demonstrated the following performance:

Correctly predicted a strong economy 10 out of 15 times (three times they predicted a moderate economy and two times a weak economy). Correctly predicted a moderate economy 7 out of 10 times (two times they predicted a strong economy and one time a weak economy). Correctly predicted a weak economy 5 out of 6 times (one time they predicted a moderate economy). The production manager wishes to know:

 

  1. 3)  What is the probability that the economy will be weak given a forecast by DSI that the economy will be weak? What is the probability that DSI will predict a strong economy?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Inventory management
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, operations-management and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Practical Management Science
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Business in Action
Business in Action
Operations Management
ISBN:
9780135198100
Author:
BOVEE
Publisher:
PEARSON CO
Purchasing and Supply Chain Management
Purchasing and Supply Chain Management
Operations Management
ISBN:
9781285869681
Author:
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
Publisher:
Cengage Learning
Production and Operations Analysis, Seventh Editi…
Production and Operations Analysis, Seventh Editi…
Operations Management
ISBN:
9781478623069
Author:
Steven Nahmias, Tava Lennon Olsen
Publisher:
Waveland Press, Inc.