Question

Zhu Manufacturing is considering the introduction of a family of new products. Long-term demand for the product group

is somewhat predictable, so the manufacturer must be concerned with the risk of choosing a process that is inappropriate. Faye Zhu is VP of operations. S
batch manufacturing or custom manufacturing, or she can invest in group technology. Zhu won't be able to forecast demand accurately until after she make
Demand will be classified into four compartments poor, fair, good, and excellent. The table below indicates the payoffs (profits) associated with each proces
as well as the probabilities of each long-term demand level:
Poor
0.05
-$200,000
19
$200,000
-$1,000,000 - $500,000
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Probability
Batch.
Custom
Group technology
a) The alternative that provides Zhu the greatest expected monetary value (EMV) is
Fair
0 45
$1,200,000
$300,000
Demand
Good
0.20
$1,100,000
$750,000
$22,000
Excellent
0 30
$1,200,000
$700,000
$2,100,000
Clear all

Answer 1

To determine the alternative that provides Zhu Manufacturing the greatest Expected Monetary Value (EMV), we need to calculate the EMV for each process (batch manufacturing, custom manufacturing, and group technology) and choose the one with the highest EMV.

EMV is calculated as the sum of the product of the payoff and its probability for each demand level. The formula for EMV is:

EMV = Σ (Probability of Demand Level × Payoff for that Demand Level)

Let's calculate the EMV for each process:

For Batch Manufacturing:

EMV (Batch Manufacturing) = (0.05 × -$200,000) + (0.45 × $1,200,000) + (0.20 × $1,100,000) + (0.30 × $1,200,000)

EMV (Batch Manufacturing) = -$10,000 + $540,000 + $220,000 + $360,000

EMV (Batch Manufacturing) = $1,110,000

For Custom Manufacturing:

EMV (Custom Manufacturing) = (0.05 × $200,000) + (0.45 × $300,000) + (0.20 × $750,000) + (0.30 × $700,000)

EMV (Custom Manufacturing) = $10,000 + $135,000 + $150,000 + $210,000

EMV (Custom Manufacturing) = $505,000

For Group Technology:

EMV (Group Technology) = (0.05 × -$1,000,000) + (0.45 × -$500,000) + (0.20 × $22,000) + (0.30 × $2,100,000)

EMV (Group Technology) = -$50,000 + (-$225,000) + $4,400 + $630,000

EMV (Group Technology) = $359,400

The alternative that provides Zhu Manufacturing the greatest Expected Monetary Value (EMV) is Group Technology with an EMV of $359,400.