Chung Manufacturing is considering the introduction of a family of new products. Long-term demand for the product group is somewhat predictable, so the manufacturer must be concerned with the risk of choosing a process that is inappropriate. Chen Chung is VP of operations. He can choose among batch manufacturing or customer manufacturing, or he can invest in group technology. Chen won’t be able to forecast demand accurately until after he makes the process choice. Demand will be classified into four compartments: poor, fair, good, and excellent. The table below indicates the payoffs (profits) associated with each process/demand combination, as well as the probabilities of each long-term demand level:

(a) Based expected value, what choice offers the greatest gain?
(b) What would Chen Chung be willing to pay for a forecast that would accurately determine the level of demand in thefuture?

  • CreatedJuly 23, 2013
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