Edwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, whereas the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years.

Demand Volme

Decision Low Medium High

Basic Model $90,000 $95,000 $175,000

Advanced Model $45,000 $110,000 $230,000

Fill in the table below for maximum and minimum profit payoffs under each model. Round your answers to the nearest dollar.

Decision alternative Maximum Minimum

Basic Model $_________ $ __________

Advanced Model $_________ $ __________

Calculate the amounts foregone by not adopting the optimal course of action for each possible demand level. Determine the maximum opportunity cost for each model. Fill in the table below. If your answer is zero, enter "0". Round your answers to the nearest dollar.

Opportunity Loss Matrix Future Events

Decision Alternative Low Medium High Maximum

Basic Model $____________ $______________ $______________ $_____________

Advanced Model $____________ $______________ $______________ $_____________

Given the uncertainty associated with the demand volume, and no other information to work with, what decision would you make?

The aggressive strategy (maximax) is to choose the: (advnaced model, basic model)

The conservative strategy (maximin) is to choose the : (advanced model, basic model)

The opportunity loss strategy is to choose the : (advanced model, basic model)

2. Edwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, whereas the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years.

Demand Volume

Decision Low Medium High

Basic Model $60,000 $105,000 $175,000

Advanced Model $55,000 $95,000 $230,000

A forecasting study determines that he probabilities of demand volume are Low = 0.2, Medium = 0.3, and High = 0.5. Using the techniques on decision analysis, determine the expected value decision. Round your answers to the nearest dollar.

Expected profit for the basic model: $ _______________

Expected profit for the advanced model: $ ______________

The __________ should be chosen using expected value criterion. (basic model, advanced model)