Eliza owns a firm that makes and sells two products, Product A and Product B. Eliza believes
Question:
Eliza owns a firm that makes and sells two products, Product A and Product B. Eliza believes the unit contribution margin from Product B is $15, but is uncertain about the unit contribution margin from Product A. She estimates that the unit contribution margin of Product A is either $0 or $20, which each being equally likely. Both products are processed on a single machine, which has total capacity of 900 hours. Each unit of Product A requires 5 hours on the machine, while each unit of Product B requires 4 hours on the machine. Both products also require safety testing, and there are a total of 900 hours available for safety testing. Each unit of Product A requires 4 hours of safety testing, while each unit of Product B requires 5 hours of safety testing. -
a. Using Solver, what product mix will maximize total contribution margin?
b. What is the most that Eliza is willing to pay a consultant to obtain perfect information about Product A’s unit contribution margin prior to making the product mix decision?
c. Let’s expand the scenario such that Eliza is going to make a product mix decision in each of two periods. Assume the machine has capacity of 900 hours in each period, and safety testing capacity of 900 hours in each period. At the start of period 1, Eliza is still uncertain about whether Product A’s unit contribution margin is $0 or $20. But, suppose Eliza could obtain perfect information about whether Product A’s unit contribution margin is $0 or $20 in period 2 by producing 50 units of Product A in period 1. Should Eliza do this? (Note that producing 50 units of Product A in period 1 might not be optimal, given your answer in part a, but may be worthwhile because of the informational benefits that such production would generate.)
d. In part c, you are evaluating whether it is worthwhile for Eliza to produce 50 units of Product A in period 1 to learn about that product’s unit contribution margin in period 2. What is the maximum number of units of Product A that Eliza would be willing to produce in period 1 to learn about Product A’s unit contribution margin in period 2?
Expert Answer:
Answer a Eliza should produce 150 units of Product A and 300 units of Product B to maximize total co... View the full answer
