The Quality Control Manager for ENTA Inc -What Action Would You Choose According to Expected Value Criterion

question 119

Essay

The quality control manager for ENTA Inc. must decide whether to accept (A1), further analyze (A2), or reject (A3) a lot of incoming material. Assume the following payoff table is available. Historical data indicates that there is 30% chance that the lot is poor quality (S1), 50 % chance that the lot is fair quality (S2), and 20% chance that the lot is good quality (S3).
$$\begin{array} { l r r r } & \mathbf { S } _ { \mathbf { 1 } } & \mathbf { S } _ { \mathbf { 2 } } & \mathbf { S } _ { \mathbf { 3 } } \\\mathbf { A } _ { \mathbf { 1 } } & 20 & 30 & 90 \\\mathbf { A } _ { \mathbf { 2 } } & 60 & 70 & 10 \\\mathbf { A } _ { \mathbf { 3 } } & 80 & 50 & 40\end{array}$$
-What action would you choose according to expected value criterion?

---

Definitions:

Total Fixed Costs

The overall sum of all costs that do not change with the level of output, such as rent, salaries, and insurance.

Total Costs

The aggregate expense incurred in the production and delivery of goods or services, combining direct, indirect, fixed, and variable costs.

Total Variable Costs

This represents the sum of all costs that vary with the level of output in the production process, such as materials and labor directly involved in making a product.

Average Fixed Costs (AFC)

The fixed costs of production (not varying with output) divided by the quantity of output produced; typically decreases as production increases.