Question
Use Excel functions, MAX, MIN, and SUMPRODUCT
1. A distributor of automobile parts can order items from three different locations. Because of the structure of shipping costs, it is more profitable to import small quantities from nearby locations. The following payoff table gives the profits possible for different combinations of location and quantity.
State of Nature (Demand level)
Alternatives
Low
Medium
High
Location 1
210,000
165,000
115,000
Location 2
200,000
165,000
150,000
Location 3
135,000
190,000
222,000
a. What would the recommendation be if the optimistic point of view was taken?
b. What would the recommendation be if the pessimistic point of view was taken?
c. What would the recommendation be if the Equal Likelihood method was used?
d. Assume the following probabilities for the future market share
low .60 medium .30 high .10
Calculate the Expected monetary values for the three options and give the recommendation based on EMV.
e. Calculate the Expected value with Perfect Information and the Expected value of Perfect Information (assuming probabilities given in part d).
f. Interpret the EV of PI
2. Elgard, Inc. is considering expanding the capacity of their store. Success of the decision depends on whether their customers accept the new line of products Elgard is evaluating. If the store expands and demand for the new line is high, the payoff will be $325, but if the demand is low the payoff will only be $35. If the store does not expand and demand for the new line is high, the payoff will be $150, but if demand is low the payoff will be $100.
The payoff table below summarizes the information given above.
States of Nature
Alternatives
High demand
Low demand
Expand
325
35
Do not expand
150
100
Perform sensitivity analysis for this problem:
a. Create a graph to show how the expected values of the two options change as the probability of high demand changes from 0 to 1. (Create only ONE graph.)
b. Interpret your graph.

State of Nature (Demand level) 

Alternatives 
Low 
Medium 
High 
Location 1 
210,000 
165,000 
115,000 
Location 2 
200,000 
165,000 
150,000 
Location 3 
135,000 
190,000 
222,000 