Case #1: New Product Design The product design group of ABC Supplies

Case #1: New Product Design The product design group of ABC Supplies has
determined that it needs to design a new series
of electric switches. It must decide on one of
three design strategies. The better and more
sophisticated the design strategy and the more
time spent on value engineering, the less will
be the variable cost. The chief of engineering
design, Dr. W. Berry, has decided that the
following costs are a good estimate of the
initial and variable costs connected with each
of three strategies: Low-tech: a low technology, low cost
process consisting of hiring several new
junior engineers. This option has a fixed
cost of $50,000 and variable cost of $0.52
each. Subcontract: a medium-cost approach
using a good outside design staff. This
approach would have a fixed cost of
$65,000 and variable cost of $0.45. High-tech: a high technology approach
using the very best of the inside staff and
the latest computer-aided design (CAD)
technology. This approach has a fixed
cost of $75,000 and variable cost of $0.36. Dr. Z. Radovilsky Dr Berry also estimated that the market forecast
for the new series of switches may be different
with the following probabilities: 200,000 units with probability of 0.4 180,000 units with probability of 0.5 160,000 units with probability of 0.1.
The price per unit is planned to be $0.99.
Dr. Berry would like to identify the best decision
based on the an expected monetary value (EMV)
criterion. Questions
1.
Draw a decision tree for this problem using
Excel. For that, you can modify the decision tree
presented in agetree_decisions.xlsx or develop a
new decision tree in Excel. Identify payoffs, and
put them on the decision tree.
2.
Calculate EMVs, identify and present the best
solution. Do your calculations in Excel as
demonstrated in agetree_decisions.xlsx. Operations Management 1