Sofia Romano worked as a corporate reliability engineer for Regal Electronics Inc. (REI), a global

company selling hundreds of namebrand products in more than 53 countries. Sofia was curious about a

new product announcement from Molio Equipment Manufacturing Inc. (MEMI), a supplier of advanced

manufacturing equipment and components. REI had a longstanding relationship with another supplier,

Decker Products Ltd. (DPL) for much of REIs production equipment. MEMI claimed that their new

equipment had undergone a complete redesign and was now capable of manufacturing product with

greater speed and quality.

Sofia had done extensive testing with DPLs equipment over the past 6 years and worked with DPL and

REI staff to optimize the setup, maintenance, training, processes, etc. As a result, over the past 2 years

average profit was reliably about $6,000 per production run. In translating what MEMIs claim of

improved speed and quality meant for REIs product line, Sofia calculated there was a 10% chance of

reaching a whopping $20,000 average profit per production run, 60% chance of obtaining $5,000

average per run, 20% chance of securing $10,000 average profit per run, and a 10% chance of no profit

at all for a given run. Note that MEMI was willing to match DPLs purchase price for the equipment.

According to MEMI, uncertainty was based on a combination of variables such as how the equipment

was setup, operated, maintained, quality and combination of raw materials used, and many other

factors. Sofia spoke at great length to MEMI about the improved potential of the new equipment, but

was hesitant to take on any increased risk. Eventually, MEMI offered, for a fixed fee of $2500, to

provide consulting services in order to show REI how to accurately predict the average profit before

each run (i.e., the four possibilities calculated above by Sofia) based on REIs anticipated mix of variables

for that run. Depending on results, Sofia could then choose to run production through the new MEMI

equipment, or the DPL equipment on another line, on an offshift, at another site, etc. Given that Sofia

had to replace the DPL production equipment on one of 10 production lines in one facility, timing

couldnt be better. She would either go with the new MEMI equipment, or simply replace the

equipment with another DPL unit.

(a) Should Sofia consider purchasing MEMIs equipment? Should she pay for MEMIs consulting

services?

(b) What other factors should be considered in determining whether to switch to MEMIs equipment?