Question

MacDonald Products, Inc., of Clarkson, New York has the option of (a) Proceeding immediately with production of a new top-of-of-the-line stereo TV that has just completed prototype testing or (b) Having the value analysis team complete a study If Ed Lusk, VP for operations, proceeds with the existing prototype (option a), the firm can expect sales to be 110,000 units at $520 each, with a probability of 0.68 and a 0.32 probability of 65,000 at $520. If, however, he uses the value analysis team (option b), the firm expets sales of 90,000 units at $760, with a probability of 0.72 and a 0.28 probability of 60,000 units at $760. Value engineering, at a cost of $100,000, is only used in option b. Which option has the highest expected monetary value (EMV)? The EMV for option a is $______ and the EMV for option b is $______. Therefore, option _____ has the highest expected monetary value. (enter your responses as integers.)

Answer 1

The EMV for option a is $4,971,200

The EMV for option b is: $6,101,600

Therefore, option B has the highest expected monetary value.

Step-by-step explanation:

The EMV of the project is the Expected Money Value of the Project.

This value is given by the sum of each expected earning/cost multiplied by each probability.

So

(a) Proceeding immediately with production of a new top-of-of-the-line stereo TV that has just completed prototype testing.

The firm can expect sales to be 110,000 units at $520 each, with a probability of 0.68 and a 0.32 probability of 65,000 at $520. So:

`EMV = 0.68*E_(1) + 0.32*E_(2)`

`E_(1)` are the earnings of selling 110,000 units at $520 each. So:

`E_(1) = 110,000*520 = 5,720,000`

`E_(2)` are the earnings of selling 65,000 units at $520 each. So:

`E_(1) = 110,000*520 = 3,380,000`

The EMV for option a is:

`EMV = 0.68*E_(1) + 0.32*E_(2) = 0.68*5,720,000+0.32*3,380,000 = 4,971,200`

(b) Having the value analysis team complete a study

The firm expets sales of 90,000 units at $760, with a probability of 0.72 and a 0.28 probability of 60,000 units at $760. Value engineering, at a cost of $100,000, is only used in option b. So:

`EMV = 0.72*E_(1) + 0.28*E_(2) - 100,000`

$100,000 is a cost, so it is subtracted.

`E_(1)` are the earnings of selling 90,000 units at $760 each. So:

`E_(1) = 90,000*760 = 6,840,000`

`E_(2)` are the earnings of selling 60,000 units at $760 each. So:

`E_(2) = 60,000*760 = 4,560,000`

The EMV for option b is:

`EMV = 0.72*E_(1) + 0.28*E_(2) - 100,000 = 0.72*(6,840,000) + 0.28*( 4,560,000) - 100,000 = 6,101,600`