Mick Karra is the manager of MCZ Drilling Products, which produces a variety of
ID: 2924051 • Letter: M
Question
Mick Karra is the manager of MCZ Drilling Products, which produces a variety of specialty valves for oil field equipment. Recent activity in the oil fields has caused demand to increase drastically and a decision has been made to open a new manufacturing facility. Three locations are being considered, and the size of the facility would not be the same in each location. Thus, overtime might be necessary at times. The following table gives the total monthly cost (in $1,000s) for each possible location under each demand possibility. The probabilities for the demand levels have been determined to be 20% for low demand, 30% for medium demand, and 50% for high demand.
Demand is Low
Demand is Medium
Demand is High
Ardmore, OK
85
110
150
Sweetwater, TX
90
100
120
Lake Charles, LA
110
120
130
Which location would be selected based on the optimistic criterion?
Which location would be selected based on the pessimistic criterion?
Which location would be selected based on the minimax regret criterion?
Which location should be selected to minimize the expected cost of operation?
How much is a perfect forecast of the demand worth?
Which location would minimize the expected opportunity loss?
What is the expected value of perfect information in this situation?
Demand is Low
Demand is Medium
Demand is High
Ardmore, OK
85
110
150
Sweetwater, TX
90
100
120
Lake Charles, LA
110
120
130
Explanation / Answer
Ans:
here,we are talking about cost,so will talk in terms of lowest
a)Optimistc criteria(lowest of lowest or best of best)
So ,best decision will be ardmore,OK
b)Pessimistic(best out of worst)
So,decision will be Sweetwater,TX
c)Opportunity loss table:
Sweetwater,Tx will be the dcision based on minimax regret approach.
d)
Expected cost is lowest for Sweetwarer TX i.e. 90*0.2+100*0.3+120*0.5=18+30+60=108
Expected cost with perfect infomation=85*0.2+100*0.3+120*0.5=17+30+60=107
So,Expect value of perfect information=107-108=-1
Low medium High Best(lowest) Ardmore, OK 85 110 150 85 Sweetwater, TX 90 100 120 90 Lake Charles, LA 110 120 130 110