Operations Research Assignment

Submitted by: Vanila Mehta (P40049)

Avalanche Corporation: Integrating Bayesian Analysis Into The Production
Decision Making Process

a) Problem Statement: Avalanche Corporation is into production of ski equipment including skis,
bindings, poles and boots. Recently, Jones presented her rationale for introducing the Avalanche
Racer. She considered producing 15049, 29951 or 39951 units of Avalanche racer (Roll
number= P40049). Jones had just provided Jackson with sales forcast for the Avalanche Racer,
according to which there is 0.6 probability of selling 35000 units and a 0.4 probability of
producing 25000 units.
Below mentioned table depicts the profits in each scenario:

Can Produce
15000 29951 39951
Probability Demand A B C
High
0.6 Snow 35000 1275000 1299265 1325490
Low
0.4 Snow 25000 775000 675490 575490
Selling price = $75
SP if production exceeds demand = $50
Break even Analysis:
Batch Process Line Process
Equation Equation
TC=FC+x.VC
475000+75x 900000+60x
Equating these, we
get
x= 28333.33333

b) The number of units of Avalanche racer for which Jackson is indifferent between line
production and batch production
It can be seen from the table above that A scenario gives the highest profits i.e. 1075000
Hence ans=15000 Avalanche Racer
c) Find the expected profit under 2 market conditions for the three possible production plans
(15000+xxx, 30000-xxx and 40000-xxx)
Table:1

Can Produce
15000 29951 39951
Probability Demand A B C
High
0.6 Snow 35000 1275000 1299265 1325490
Low
0.4 Snow 25000 775000 675490 575490
Expected Payoffs 1075000 1049755 1025490

d.) What is the best decision to take using optimistic criteria, conservative criteria, min-max
regret criteria and the expected value criteria.

Can Produce
15000 29951 39951
Probability Demand A B C
High
0.6 Snow 35000 1275000 1299265 1325490
Low
0.4 Snow 25000 775000 675490 575490

Optimistic Criteria: He will produce 40000 units and will get a profit of $1325490
Conservative Criteria: He will produce 40000 units and will geta profit of $575490
Min-max regret Criteria:
In this method, we ll find the regret of each situation

Can Produce
15000 30000 40000
Probability Demand A B C
High
0.6 Snow 35000 50490 26225 0
0.4 Low Snow 25000 0 99510 199510
Maximum
Regret 50490 99510 199510

Thus, he will produce 15000 units.

Expected Value criteria: As can be seen from table 1, expected return is $1075000. Therefore he
will produce 15000 units.
e.) What is the expected value of perfect information about the weather conditions?
High Snow
1325490
Case 1 FF's information is perfect
Consult FF

1105294

Low Snow 775000

0.4

Don’t Consult FF
1075000
As it is clear that, EVPI = $1105294
Difference between profits of two decisions = 1105294 – 1075000 = $30294 which is greater
than consultant’s fee i.e. $20000
Hence, he should hire the consultant.

f.) What is the maximum amount Jackson should be willing to pay to Fantastic Forecasters
keeping in mind the information provided by them is not perfect and follows the specifications
given in exhibit 2 of the case.

If we draw the decision criteria with the help of probabilities given in exhibit 2. We obtain below
mentioned data

P(F=HS | HS) = 0.9

P(F=LS | HS) = 0.1
P(F=HS | LS) = 0.25
P(F=LS | LS) = 0.75

Bayesian probability table:

  HS LS
FF=HS 5400 1000
FF=LS 600 3000
6000 4000
 0.843 1275000
HS

1195725
A

LS 0.156 775000

0.64 1200657 HS 0.843 1299265

FF=HS B
1207165
LS 0.156 675490

1081465.286
Consult FF 1207165 HS 0.843 1325490
C

LS
0.156 575490

HS 0.166 1275000

858000
A

LS 0.834 775000
858000
0.36 779037
FF=LS B HS 0.166 1299265

LS
0.834 675490
Don’t consult FF
1075000 HS
699990 0.166 1325490
C

LS 0.834 575490

So, the difference between both profits is $6465. So, he won’t hire consultant.