Question

MacDonald Products, Inc., of Clarkson, New York, has the option of

( a) proceeding immediately with production of a new top- of- the- line stereo TV that has just completed prototype testing or

( b) having the value analysis team complete a study.

If Ed Lusk, VP for operations, proceeds with the existing prototype (option a), the firm can expect sales to be 95,000 units at $ 630 each, with a probability of 0.66, and a 0.34 probability of 60,000 at $ 630. If, however, he uses the value analysis team (option b), the firm expects sales of 90,000 units at $ 760, with a probability of 0.67, and a 0.33 probability of 65,000 units at $ 760. Value analysis, at a cost of $ 105,000, is only used in option b. Which option has the highest expected monetary value (EMV)?

The EMV for option a is ​$____and the EMV for option b is $_____Therefore, option_____has the highest expected monetary value.

Answer 1

EMV = Probability × Price per unit × Number of units

✓ Option a

EVM= ( 0.66 × 630 × 95000 ) + ( 0.34 × 630 × 60000) = 39501000 + 12852000 = 52353000

✓ Option b

EVM = ( 0.67 × 760 × 90000 ) + ( 0.33 × 760 × 65000 ) - 105000 = 45828000 + 16302000 - 105000 = 62025000

The EVM for option a is $ 52353000 and the EVM for option b is $ 62025000. therefore, Option b has the highest expected monetory value.

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