An Appliance Dealer Must Decide How Many (If Any)new Microwave

question 36

Essay

An appliance dealer must decide how many (if any)new microwave ovens to order for next month.The ovens cost $220 and sell for $300.Because the oven company is coming out with a new product line in two months,any ovens not sold next month will have to be sold at the dealer's half price clearance sale.Additionally,the appliance dealer feels he suffers a loss of $25 for every oven demanded when he is out of stock.On the basis of past months' sales data,the dealer estimates the probabilities of monthly demand (D)for 0,1,2,or 3 ovens to be .3,.4,.2,and .1,respectively.
The dealer is considering conducting a telephone survey on the customers' attitudes towards microwave ovens.The results of the survey will either be favorable (F),unfavorable (U)or no opinion (N).The dealer's probability estimates for the survey results based on the number of units demanded are:
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$$\begin{array} { | l | l | l | l | } \hline \mathrm { P } ( \mathrm { F } \mid \mathrm { D } = 0 ) = .1 & \mathrm { P } ( \mathrm { F } \mid \mathrm { D } = 2 ) = .3 & \mathrm { P } ( \mathrm { U } \mid \mathrm { D } = 0 ) = .8 & \mathrm { P } ( \mathrm { U } \mid \mathrm { D } = 2 ) = .1 \\\hline \mathrm { P } ( \mathrm { F } \mid \mathrm { D } = 1 ) = .2 & \mathrm { P } ( \mathrm { F } \mid \mathrm { D } = 3 ) = .9 & \mathrm { P } ( \mathrm { U } \mid \mathrm { D } = 1 ) = .3 & \mathrm { P } ( \mathrm { U } \mid \mathrm { D } = 3 ) = .1 \\\hline\end{array}$$
a.What is the dealer's optimal decision without conducting the survey?
b.What is the EVPI?
c.Based on the survey results what is the optimal decision strategy for the dealer?
d.What is the maximum amount he should pay for this survey?

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Definitions:

Raw Materials

Basic, unprocessed inputs used in manufacturing or production processes to create finished goods.

Indirect Materials

Materials used in the production process that cannot be directly traced to a finished product.

Employer Payroll Taxes

Taxes that employers are required to pay on behalf of their employees, including Social Security and Medicare taxes in the United States.

Manufacturing Overhead Applied

The portion of manufacturing overhead costs allocated to each unit of production.