H. Hedgepeth Mechanicals, Ltd.’s (HHM) marketing team has determined customers are in need of a series of new design power widgets. The market forecast is for 200,000 units for the better design. Engineering has developed three possible solutions. Dr. Hogert Hedgepeth, the owner and founder, recognizes if more effort is put into value engineering this will yield lower variable costs (in turn, lower total cost).

The initial and variable cost estimates are:

option	fixed cost	variable/unit	probability	var./unit	prob.	var./unit	prob.
low tech	45000	$0.55	0.3	0.50	0.3	0.45	0.4
subcontract	65000	0.45	0.7	0.40	0.2	0.35	0.1
high tech	75000	0.40	0.9	0.35	0.1	n/a	n/a

Deliverables:

1. Prepare a decision tree to evaluate HHM’s three options. Show all necessary calculations. Marks = 3
2. Based on the expected monetary value (EMV), what is HHM’s best choice (assuming the probability estimates are accurate)? Marks = 4
3. What factor(s) might influence HHM’s decision other than a choice based solely on the options’ EMV? Marks

Answer rating: 100% (QA)

Decision Tree b Expected Payoff Low Tech 14... View the full answer