Question

Mini Case Study Your team has a decision to make – manufacture a component in house or outsource the component to an external vendor. Information on the scenario has been provided below: You have two options: Manufacturing which will cost you $20,000. If you manufacture, there is 70% chance of high demand and you will realize $40,000 in revenue and a 30% chance of low demand and you will realize $25,000. Purchasing which will cost you $25,000. If you purchase, there is 60% chance of high demand and you will realize $45,000 in revenue and a 40% chance of low demand and you will realize $20,000 What is the total EMV for purchasing the component? HINT - Build a decision tree to answer the question. $12,000 $11,500 $10,000 $2000

Answer 1

To find the total Expected Monetary Value (EMV) for purchasing the component, we can build a decision tree to calculate the EMV for each possible outcome.

First, let's calculate the EMV for purchasing the component:

EMV = (Probability of high demand * Revenue if high demand) + (Probability of low demand * Revenue if low demand) - Cost

EMV for purchasing = (0.60 * $45,000) + (0.40 * $20,000) - $25,000

EMV for purchasing = $27,000 + $8,000 - $25,000

EMV for purchasing = $10,000

Therefore, the total EMV for purchasing the component is $10,000.

So, the correct answer is:

$10,000