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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

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