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ManRep 07 Task Performance 1 PDF

The document presents a case study about a factory owner, Mr. X, who must decide how many units to commit to a special fixed contract each month to maximize profits. There are three contract options: 500, 700, or 900 units. The document calculates the expected values for each option and determines that the 700-unit contract has the highest expected value of 4,500. It then considers different decision making approaches like maximin, maximax, and minimax regret to determine the optimal contract level. The value of perfect information is also calculated to be 100, which is the maximum Mr. X should pay for a market survey.

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[AP-Alumni] Sean Xavier Saculles
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375 views2 pages

ManRep 07 Task Performance 1 PDF

The document presents a case study about a factory owner, Mr. X, who must decide how many units to commit to a special fixed contract each month to maximize profits. There are three contract options: 500, 700, or 900 units. The document calculates the expected values for each option and determines that the 700-unit contract has the highest expected value of 4,500. It then considers different decision making approaches like maximin, maximax, and minimax regret to determine the optimal contract level. The value of perfect information is also calculated to be 100, which is the maximum Mr. X should pay for a market survey.

Uploaded by

[AP-Alumni] Sean Xavier Saculles
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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BM2108

RISK AND UNCERTAINTY IN DECISION MAKING – Part 1

Case 1: Expected Values


Mr. X has a factory whose monthly capacity is to produce 1,200 units of product X. The demand from regular
customers is risky and is as follows:

Monthly Demand P
400 20%
500 60%
700 20%
100%

Regular customers generate P5 per unit. To maximize the unutilized capacity, Mr. X has the opportunity to
enter into a fixed contract. There are three (3) options for this fixed contract: 500 units, 700 units, and 900
units. For the fixed contract, ABC will generate a contribution margin of P3 per unit.

Required: Prepare the expected value table and calculate the expected value for each special contract.
Using Expected Values, what is the optimal level of special contract must Mr. X commit to maximize profits?

SPECIAL CONTRACT
D P 500 700 900
400 20% 3,500 4,100 4,200
500 60% 4,000 4,600 4,200
6000 20% 5,000 4,600 4,200
100% 4,100 4,500 4,200

The highest EV among the three (3) option is a 700-unit Special Contact, which would yield an EV of 4,500.

Case 2: Maximin
Using the same information as Case 1, if Mr. X uses the maximin approach, what special contract must Mr. X
commit each month?

SPECIAL CONTRACT
D P 500 700 900
400 20% 3,500 4,100 4,200
500 60% 4,000 4,600 4,200
6000 20% 5,000 4,600 4,200
100% 4,100 4,500 4,200

Therefore, Mr. X must choose the 900-units contract.

This study source was downloaded by 100000878909998 from CourseHero.com on 01-13-2024 22:38:45 GMT -06:00

https://www.coursehero.com/file/186870865/ManRep-07-Task-Performance-1pdf/
Case 3: Maximax
Using the same information as Case 1, if Mr. X uses the maximax approach, what special contract must Mr. X
commit each month?

SPECIAL CONTRACT
D P 500 700 900
400 20% 3,500 4,100 4,200
500 60% 4,000 4,600 4,200
6000 20% 5,000 4,600 4,200
100% 4,100 4,500 4,200

Therefore, Mr. X must choose the 500-units contract.

Case 4: Minimax regret


Using the same information as Case 1, if Mr. X uses the Minimax Regret approach, what special contract must
Mr. X commit each month?

SPECIAL CONTRACT
D P 500 700 900
400 20% 700 100 -
500 60% 600 - 400
6000 20% - 400 800

Therefore, Mr. X must choose a 700-units contract.

Case 5: Value of Perfect information


Using the same information as Case 1, Mr. X was approached by a market research company that claims that
their survey results will give perfect information to enable Mr. X to determine the demand from its regular
customers a month before accepting the special order.

Required: What is the maximum amount that Mr. X should pay for the survey?
EV of no perfect information = 4,500 (700) units
EV of perfect information = 4,200 x 20% + 4,600 x 60% + 5,000 x 20%
= 840 +2,760 + 1,000
= 4,600
VOPI = 4,600 - 4,500 = 100
The maximum amount that Mr. X should pay for the survey is 100.

This study source was downloaded by 100000878909998 from CourseHero.com on 01-13-2024 22:38:45 GMT -06:00

https://www.coursehero.com/file/186870865/ManRep-07-Task-Performance-1pdf/
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