ABC Inc. must make a decision on its current capacity for next year. ABC is cons
ID: 3439917 • Letter: A
Question
ABC Inc. must make a decision on its current capacity for next year. ABC is considering three alternatives. For each alternative, estimated profits (in $000s) based on next year’s demand are shown in the table below. ABC Inc. estimates that the probability of low demand is 0.4 and the probability of high demand is 0.6.
.a True of False. Alternative 2 (A2) dominates Alternative 3 (A3).
.b Which alternative should be chosen based on the optimistic (maximax) decision criterion?
.c Which alternative should be chosen based on the conservative (maximin) decision criterion? 4.4.d (0.3 pt) Construct the regret table. What is the maximum regret if ABC chooses A1. [Give a numerical answer in $.]
.e Which alternative should be chosen based on the minimax regret criterion?
.f Which alternative should be chosen using the expected monetary value criterion?
Next Year's Demand Alternative Low High A1 : Expand 97 192 A2 : Subcontract 125 175 A3 : Do Nothing 120 147Explanation / Answer
a.
Expected profit for A2 = 0.4*125+0.6*175 = 155
Expected profit for A3 = 0.4*120+0.6*147 = 136.2
Thus the alternative A2 dominates A3 . Hence the given statement is true.
b.
Thus using the Maximax criteria Alternative 1 which is to expand should be chosen.
c.
Thus using the maximin criteria Alternative 2 A2 should be chosen.
d.
The maximum regret if ABC choses A1 will be $192,000
e.
Thus using the minimax regret criterion Alternative 3 A3 should be chosen.
f.
Expected return for A1 = 0.4*97+0.6*192 = 154
Expected return for A2 = 0.4*125+0.6*175 = 155
Expected return for A3 = 0.4*120+0.6*147 = 136.2
Thus using expected monetary value criterion A2 should be chosen.
Next Year's Demand Maximum Alternative Low High A1 : Expand 97 192 192 A2 : Subcontract 125 175 175 A3 : Do Nothing 120 147 147