NUMERICAL PROBLEMS

Q1. 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 0.6, and a 0.4 probability of 75,000 at $
550. If, however, he uses the value analysis team (option b), the firm expects sales of 75,000 units at $
750, with a probability of 0.7, and a 0.3 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), Please use decision tree to expedite
your answer?

Q2. McBurger, Inc., wants to redesign its kitchens to improve productivity and quality. Three designs,
called designs K1, K2, and K3, are under consideration. No matter which design is used, daily
production of sandwiches at a typical McBurger restaurant is for 500 sandwiches. A sandwich costs $
1.30 to produce. Non-defective sandwiches sell, on the average, for $ 2.50 per sandwich. Defective
sandwiches cannot be sold and are scrapped.

The goal is to choose a design that maximizes the expected profit at a typical restaurant over a 300-
day period. Designs K1, K2, and K3 cost $ 100,000, $ 130,000, and $ 180,000, respectively.
Under design K1, there is a 0.80 chance that 90 out of each 100 sandwiches are non-defective and a
0.20 chance that 70 out of each 100 sandwiches are non-defective. Under design K2, there is a 0.85
chance that 90 out of each 100 sandwiches are non-defective and a 0.15 chance that 75 out of each
100 sandwiches are non-defective. Under design K3, there is a 0.90 chance that 95 out of each 100
sandwiches are non-defective and a 0.10 chance that 80 out of each 100 sandwiches are non-defective.

What is the expected profit level of the design that achieves the maximum expected 300-day profit
level. Please explain by using decision tree analysis.