Demand Medium $40 $45 Decision Manufacture component Purchase component a. Determine the best decisions using the maximax, maximin, and opportunity loss decision criteria.. b. Assume that the probability of low demand is 0.35, of medium demand is 0.35, and of high demand is 0.30. What is the best decision using the expected value criterion and what is the expected value of perfect information? Low $220 $210 High $100 $70
Demand Medium $40 $45 Decision Manufacture component Purchase component a. Determine the best decisions using the maximax, maximin, and opportunity loss decision criteria.. b. Assume that the probability of low demand is 0.35, of medium demand is 0.35, and of high demand is 0.30. What is the best decision using the expected value criterion and what is the expected value of perfect information? Low $220 $210 High $100 $70
Chapter19: Pricing Concepts
Section: Chapter Questions
Problem 6DRQ
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Transcribed Image Text:28. 4.4 The Gorman Manufacturing Company must decide whether to purchase a component part from a supplier
or to manufacture the component at its own plant. If demand is high, it would be to Gorman's advantage to
manufacture the component. If demand is low, however, Gorman's unit manufacturing cost will be high because
of underutilization of equipment. The projected profit in thousands of dollars for Gorman's make-or-buy
decision is as follows.
Demand
Medium
$40
$45
Decision
Manufacture component
Purchase component
a. Determine the best decisions using the maximax, maximin, and opportunity loss decision criteria.
b. Assume that the probability of low demand is 0.35, of medium demand is 0.35, and of high demand is
0.30. What is the best decision using the expected value criterion and what is the expected value of
perfect information?
Low
$220
$210
High
$100
$70
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