The Aero Spad plant manager must choose a process for assembling parts. The size of the production run will depend on demand (or order size), which is an uncertain quantity. The following quantities are believed to be equally likely: 4,000, 6,000, 8,000, 10,000. The parts will be sold for $200 each, regardless of quantity ordered. The following data apply to the three processes of production:
Process A Process B Process C
Setup Costs $200000 $160000 $100000
Unit Material Costs 20 30 40
Unit Labor Costs 20 20 30
1. Using the total profit from selling the parts as the payoff measure, construct the company’s payoff table.
2. Determine the expected payoff for each action. Which process should be used?
3. Use the most likely event criterion to find the best action.
4. Use the expected regret criterion to choose the best action.
5. Draw the manufacturer’s decision tree.