The Quality Control Manager for NKA Inc

question 42

Short Answer

The quality control manager for NKA Inc. must decide whether to accept (alternative 1), further analyze (alternative 2), or reject (alternative 3) an incoming shipment (lot) of microchips. The historical data indicate that there is a 30 percent chance that the lot is poor quality (S₁), 50 percent chance that the lot is fair quality (S₂), and 20 percent chance that the lot is good quality (S₃). Assume the following payoff table is available. The values in the payoff table are in thousands of dollars.
What alternative action should be selected according to the expected monetary value criterion?

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Definitions:

Total Fixed Costs

The sum of all costs required to produce any good or service that remains constant, regardless of the level of production or output.

Cash Flows

The sum total of monetary transfers into and away from a business, crucially impacting its solvent status.

NPV

Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment or project, by calculating the difference between the present value of cash inflows and outflows.

Forecasting Risk

The potential for a significant difference between forecasted and actual results due to assumptions or model inaccuracies.