The Ruddle Co. Ltd had planned to install and, with effect from next April, commence operating sophisticated

Question:

The Ruddle Co. Ltd had planned to install and, with effect from next April, commence operating sophisticated machinery for the production of a new product - product Zed. However, the supplier of the machinery has just announced that delivery of the machinery will be delayed by six months and this will mean that Ruddle will not now be able to undertake production using that machinery until October.
'The first six months of production' stated the commercial manager of Ruddle, 'is particularly crucial as we have already contracted to supply several national supermarket groups with whatever quantities of Zed they require during that period at a price of £40 per unit. Their demand is, at this stage, uncertain but would have been well within the capacity of the permanent machinery we were to have installed. The best estimates of the total demand for the first period are thought to be:

Whatever the level of demand, we are going to meet it in full even if it means operating at a loss for the first half year. Therefore I suggest we consider the possibility of hiring equipment on which temporary production can take place.' Details of the only machines which could be hired are:

In addition to the above costs there will be a variable material cost of £5 per unit. For purchases greater than 10 000 units a discount of 20 per cent per unit will be given, but this only applies to the excess over 10 000 units.
Should production capacity be less than demand then Ruddle could subcontract production of up to 6000 units but would be required to supply raw materials. Subcontracting costs are:
up to 4000 units subcontracted £30 per unit any excess over 4000 units subcontracted £35 per unit. These subcontracting costs relate only to the work carried out by the subcontractor and exclude the costs of raw materials.
The commercial manager makes the following further points, 'Due to the lead time required for setting up production, the choice of which machine to hire must be made before the precise demand is known. However, demand will be known in time for production to be scheduled so that an equal number of units can be produced each month. We will, of course, only produce sufficient to meet demand.
'We need to decide which machine to hire. However, I wonder whether it would be worthwhile seeking the assistance of a firm of market researchers? Their reputation suggests that they are very accurate and they may be able to inform us whether demand is to be 10, 14 or 16 thousand units.'
Required:
(a) For each of the three machines which could be hired show the possible monetary outcomes and, using expected values, advise Ruddle on its best course of action.
(b) (i) Calculate the maximum amount which it would be worthwhile to pay to the firm of market researchers to ascertain details of demand. (You are required to assume that the market researchers will produce an absolutely accurate forecast and that demand will be exactly equal to one of the three demand figures given.)
(ii) Comment on the view that as perfect information is never obtainable the calculation of the expected value of perfect information is not worthwhile. Briefly explain any uses such a calculation may have.