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): State of Nature Low Demand Medium Demand High Demand Decision Alternative s1 s2 s3 Manufacture, d1 -20 40 100 Purchase, d2 10 45 70 The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30. Use a decision tree to recommend a decision.Recommended decision: Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand. EVPI: $ fill in the blank 3 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: P(F | s1) = 0.10 P(U | s1) = 0.90 P(F | s2) = 0.40 P(U | s2) = 0.60 P(F | s3) = 0.60 P(U | s3) = 0.40 What is the probability that the market research report will be favorable? If required, round your answer to three decimal places.P(F) = fill in the blank 4 What is Gorman's optimal decision strategy?Decision strategy:If F then .If U then . What is the expected value of the market research information?Expected value: $ fill in the blank 7 What is the efficiency of the information? If required, round your answer to one decimal place.Efficiency: fill in the blank 8%

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

See similar textbooks

Related questions

Question

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):

	State of Nature
	Low Demand	Medium Demand	High Demand
Decision Alternative	s₁	s₂	s₃
Manufacture, d₁	-20	40	100
Purchase, d₂	10	45	70

The state-of-nature probabilities are P(s₁) = 0.35, P(s₂) = 0.35, and P(s₃) = 0.30.

Use a decision tree to recommend a decision.

Recommended decision:
Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.

EVPI: $ fill in the blank 3
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:

P(F | s₁) = 0.10 P(U | s₁) = 0.90

P(F | s₂) = 0.40 P(U | s₂) = 0.60

P(F | s₃) = 0.60 P(U | s₃) = 0.40

What is the probability that the market research report will be favorable? If required, round your answer to three decimal places.

P(F) = fill in the blank 4
What is Gorman's optimal decision strategy?

Decision strategy:

If F then

.

If U then

.
What is the expected value of the market research information?

Expected value: $ fill in the blank 7
What is the efficiency of the information? If required, round your answer to one decimal place.

Efficiency: fill in the blank 8%