NATIONAL INSTITUTE OF TECHNOLOGY

DURGAPUR

PRINCIPLES OF MANAGEMENT (MSC 731)

DECISION MAKING PROBLEM & SOLUTION

Q1. A TV dealer finds that the cost of TV in stock for a week is Rs. 30 and the cost of a
unit shortage is Rs. 70. For one particular model of TV the probability distribution of weekly
sales is as follows.
Weekly Sales 0 1 2 3 4 5 6
Probability 0.10 0.10 0.20 0.25 0.15 0.15 0.05
How many units per week should the dealer order? Also find EVPI & EOL.

Solution : Per Unit Stock Price ( SP) = Rs. 30 Per unit Shortage Cost (SC) = Rs.70
Objective is to minimize Shortage cost
Table1 Showing the calculation of Ordering Cost(Loss Table]

Alternatives[Weekly State of Nature[Order]

sales] 0 1 2 3 4 5 6
0 0 -30 -60 -90 -120 -150 -180
1 -70 0 -30 -60 -90 -120 -150

2 -140 -70 0 -30 -60 -90 -120

3 -210 -140 -70 0 -30 -60 -90

4 -280 -210 -140 -70 0 -30 -60

5 -350 -280 -210 -140 -70 0 -30

6 -420 -350 -280 -210 -140 -70 0
Expected Payoff

Alternatives[Weekly State of Nature[Order]

sales] 0 1 2 3 4 5 6
0 0 -3 -6 -9 -12 -15 -18
1 -7 0 -3 -6 -9 -12 -15
2 -28 -14 0 -6 -12 -18 -24
3 -52.5 -35 -17.5 0 -7.5 -15 -22.5
4 -42 -31.5 -21 -10.5 0 -4.5 -9

5 -52.5 -42 -31.5 -21 -10.5 0 -4.5

6 -21 -17.5 -14 -10.5 -7 -3.5 0

TOTAL -203 -143 -93 -63 -58 -68 -93

Minimum Occurs Correspond to 4 orders[Most Negative] EMV= -58

Alternatives[Weekly
sales] State of Nature[Order]
0 1 2 3 4 5 6
0 0 30 60 90 120 150 180
1 70 0 30 60 90 120 150
2 140 70 0 30 60 90 120
3 210 140 70 0 30 60 90
4 280 210 140 70 0 30 60
5 350 280 210 140 70 0 30
6 420 350 280 210 140 70 0

Expected Loss Table

Alternatives[Weekly State of Nature[Order]

sales] 0 1 2 3 4 5 6
0 0 3 6 9 12 15 18
1 7 0 3 6 9 12 15
2 28 14 0 6 12 18 24
3 52.5 35 17.5 0 7.5 15 22.5
4 42 31.5 21 10.5 0 4.5 9
5 52.5 42 31.5 21 10.5 0 4.5
6 21 17.5 14 10.5 7 3.5 0
TOTAL 203 143 93 63 58 68 93

Most Minimum occurs for order 4[ EOL=58]

EVPI= EPPI – EMV

EVPI = Expected value of Perfect Information
EPPI= Expected Payoff for perfect information

EMV= Expected Monetary Value

EPPI=0
EVPI= 0 –(-58) = 58= EOL

Now, E(x) = Ʃ AiPi where A=Price; P=Probability

2. Under an employment promotion programme, it is proposed to allow sale of newspapers
on the buses during off-peak hours. The vendor can purchase the newspapers at a special
concessional rate of 25 paise per copy against the selling price of 40 paise. Any unsold copies
are, however, a dead loss. The vendor has estimated the following probability distribution for
the number of copies download:
No of 15 16 17 18 19 20
Copies(X)
Probability(P) 0.04 0.19 0.33 0.26 0.11 0.07
a. How many copies should he order so that his expected profit will be maximum?
b. Compute EOL ,EPPI. And EVPI
c. The vendor is thinking of spending on a small market survey to obtain additional
information regarding the demand levels. How much should he be willing to spend on
such a survey? EOL= 0.171

Solution: Given Per unit cost price ( CP) = Rs. 0.25( MC)
Per Unit Selling Price(SP)= Rs. 0.40 (MR)
Per Unit Profit= SP- CP= Rs. 0.15(MP)=MR-MC
Per Unit Loss = Rs. 0.25 (ML)

Where MC= Marginal Cost MP= Marginal Profit ML=

Marginal Loss MR=Marginal Revenue
Let D = Demand and S = Supply (Order)
When D>=S implies No Loss D=15 S=17
D=17 S=16 D=17 S=17 perfect information D=S
D<S Loss [Unsold]
TABLE SHOWING THE CALCULATION OF PAYOFF MATRIX[#1]

Alternatives[Demand] State of Nature[Supply]

15 16 17 18 19 20
MP=0.15
15(.04) 2.25 2.00 1.75 1.50 1.25 1.00
16(0.19) 2.25 2.40 2.15 1.90 1.65 1.40
ML=0.25

17(0.33) 2.25 2.40 2.55 2.30 2.05 1.80

18(0.26) 2.25 2.40 2.55 2.70 2.45 2.20

19(0.11) 2.25 2.40 2.55 2.70 2.85 2.60

20(0.07) 2.25 2.40 2.55 2.70 2.85 3.00

TABLE SHOWING THE CALCULATION OF EXPECTED PAYOFF

MATRIX
Alternatives[Demand] State of Nature[Supply]
15 16 17 18 19 20
15(0.04) 0.09 0.08 0.07 0.06 0.05 0.04
16(0.19) 0.427 0.45 0.40 0.33 0.28
5 6 85 0.38 25 5
17(0.33) 0.742 0.79 0.84 0.75 0.67 0.59
5 2 15 9 65 4
18(0.26) 0.62 0.66 0.70 0.63 0.57
0.585 4 3 2 7 2
19(0.11) 0.247 0.26 0.28 0.29 0.31 0.28
5 4 05 7 35 6
20(0.07) 0.157 0.16 0.17 0.18 0.19
5 8 85 9 95 0.21
Total EMV 2.25 2.384 2.442 2.387 2.209 1.987
EMV= Expected Monetary Value

Maximium EMV corresponds to 17 units supply.

TABLE SHOWING THE CALCULATION OF OPPORTUNITY LOSS
MATRIX[Subtracting all elements from the maximum element
in each row]

Alternatives[Demand] State of Nature[Supply]

15 16 17 18 19 20
15 0 0.25 0.50 0.75 1.00 1.25
16 0.15 0 0.25 0.50 0.75 1.00

17 0.30 0.15 0 0.25 .50 0.75

18 0.45 0.30 0.15 0 0.25 0.50

19 0.60 0.45 0.30 0.15 0 0.25

20 0.75 0.60 0.45 0.30 0.15 0

TABLE SHOWING THE CALCULATION OF EXPECTED OPPORTUNITY LOSS[EOL]

Alternatives[Demand] State of Nature[Supply]
15 16 17 18 19 20
15(0.04) 0 0.01 0.02 0.03 0.04 0.05
16(0.19) 0.028 0.04 0.09 0.14
5 0 75 5 25 0.19
17(0.33) 0.04 0.08 0.16 0.24
0.099 95 0 25 5 75
18(0.26) 0.07 0.03 0.06
0.117 8 9 0 5 0.13
19(0.11) 0.04 0.03 0.01 0.02
0.066 95 3 65 0 75
20(0.07) 0.052 0.04 0.03 0.02 0.01
5 2 15 1 05 0
TOTAL 0.363 .229 .171 .245 .423 .645

Order 17 units for minimum loss

Alternatives[Demand] State of Nature[Supply]
15 16 17 18 19 20
15 0.09 0.08 0.07 0.06 0.05 0.04
16 0.427 0.45 0.40 0.33 0.28
5 6 85 0.38 25 5
17 0.742 0.79 0.84 0.75 0.67 0.59
5 2 15 9 65 4
18 0.62 0.66 0.70 0.63 0.57
0.585 4 3 2 7 2
19 0.247 0.26 0.28 0.29 0.31 0.28
5 4 05 7 35 6
20 0.157 0.16 0.17 0.18 0.19
5 8 85 9 95 0.21

Total EMV 2.25 2.384 2.442 2.387 2.209 1.987

EVPI= EPPI- EMV= 2.613-2.442=0.171=EOL(min)
EVPI=Expected Value of perfect information.

EPPI= 0.09+0.456+0.8415+0.702+0.3135+0.21=2.613

EPPI=Expected Payoff for perfect information