MGMT 3370

Chapter 5 Homework
5.14 The product design group of Iyengar Electric Supplies, Inc., has determined that it needs to
design a new series of switches. It must decide on one of three design strategies. The market
forecast is for 200,000 units. The better and more sophisticated the design strategy and the more
time spent on value engineering, the less will be the variable cost. The chief of engineering
design, Dr. W. L. Berry, has decided that the following costs are a good estimate of the initial and
variable costs connected with each of the three strategies:

Low-tech: A low-technology, low-cost process consisting of hiring several new junior

engineers. This option has a fixed cost of $45,000 and variable-cost probabilities of .3 for $.55
each, .4 for $.50, and .3 for $.45. (Variable Cost- $.55 Probability-.3 Cost-$100,000)
(Variable cost- $.50 Probability-.4 Cost- $67,000) (Variable Cost- $.45 Probability- .3 Cost-
$27,000). Total Variable Cost= $194,000. $194,000+$45,000= $239,000
Subcontract: A medium-cost approach using a good outside design staff. This approach
would have a fixed cost of $65,000 and variable-cost probabilities of .7 of $.45, .2 of $.40, and .1
of $.35. (Variable Cost- $.45 Probability-.7 Cost- $86,000) (Variable Cost- $.40 Probability .
2 Cost- $23,000) (Variable Cost- $.35 Probability-.1 Cost- $7,000) Total Variable
Cost=$116,000. $116,000+$65,000= $181,000
High-tech: A high-technology approach using the very best of the inside staff and the latest
computer-aided design technology. This approach has a fixed cost of $75,000 and variable-cost
probabilities of .9 of $.40 and .1 of $.35. (Variable Cost- $.40 Probability- .9 Cost- $79,000)
(Variable Cost- $.35 Probability-.1 Cost-$7,000) Total Variable Cost= $86,000. $86,000+
$75,000= $161,000
What is the best decision based on an expected monetary value (EMV) criterion? (Note: We
want the lowest EMV, as we are dealing with costs in this problem.) Based on an expected
monetary value criterion the high tech option would be the best choice.

5.15 MacDonald Products, Inc., of Clarkson, New York, has the option of
(a) proceeding immediately with production of a new top-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 100,000 units at $550 each, with a probability of .6, and a .4 probability of
75,000 at $550. If, however, he uses the value analysis team (option b), the firm expects sales of
MGMT 3370

75,000 units at $750, with a probability of .7, and a .3 probability of 70,000 units at $750. Value
analysis, at a cost of $100,000, is only used in option b. Which option has the highest expected
monetary value (EMV)?
Option A- .6(100,000*550) + .4(75,000*550)= 49,500,000
Option B- .7(75,000*750) + .3(70,000*750)= 55,125,000
Option B has the highest expected monetary value between the two options.