M O D U L E
TEACHING SUGGESTIONS
Teaching Suggestion M3.1: Reviewing the Normal Curve. Most of the material in this supplement requires the use of the normal curve. A review of the basic principles of the normal curve found in the probability chapter (Chapter 2) would be helpful before this module is started. Teaching Suggestion M3.2: Covering Break-Even Analysis First. Covering break-even calculations rst helps students get into decision theory and normal curve analysis. This material will also help students get back into the fundamental principles of normal curve theory. Once break-even analysis has been mastered by students, they should be ready for the rest of the material in this module. Teaching Suggestion M3.3: Spending More Time on EVPI and the Normal Distribution. EVPI and the normal distribution concepts are difcult for many students. You may need to spend more time on this topic and reinforce the basic steps involved. Some instructors reduce coverage or eliminate this topic.
information to the number you obtained in step two. EVPI will always be equal to EOL. M3-5.
M = 60,000 = 10,000
a.
BE =
books
b. EMV (P/U VC/U)(M) FC (24 16)(60,000) 160,000 $480,000 $160,000 $320,000 M3-6. a. OLF K(BE X) for X BE OLF 0 where K (P/U VC/U) 8 Thus, EOL $8 (20,000 X) for X 20,000 $0 where X is sales in units. b. EOL KN(D) with K $8 10,000 60, 000 20, 000 D= =4 10, 000 and N(D) 0.000007145. for X 20,000 for X BE
279
REVISED
Z03_REND6289_10_IM_MOD3.QXD 5/15/08 8:57 PM Page 280
280
MODULE 3
DECISION THEORY
AND THE
NORMAL DISTRIBUTION
Thus, EOL (8)(10,000)(0.000007145) $0.57160 c. EVPI $0.57160, since EOL EVPI 20, 000 60, 000 = 4 d. Z = 10, 000 standard deviations from A Z value for 4 is not found in the table, but we used 0.99997. Thus, P(prot) 0.99997 99.99% P(loss) M3-7. 0.00003 0.003% e. The rm should print the book
d. EVPI EOL EOL K N(D) K6 3,571 9, 000 6, 000 D= = 0.8401 3, 571 N(.84) .1120 Thus, EOL (6)(3571)(0.1120) $2,399.71, and Rudy should be willing to pay up to $2,399.71 for a marketing research study. M3-8. FC $24,000 VC/U $8 P/U $24
FC 24, 000 = = 1, 500 sets P / U VC / U 24 8 b. If D 2,000, True Lens should produce the lenses. The expected prot would be BE =
a.
$48,000
= 9,000
12,000
Less expenses Fixed cost 24,000 Variable cost (2,000 $8/set) 16,000 Total expenses (40,000) Prot $8,000) M3-9. EMV ($28 $20)(35,000) $16,000 $264,000 No effect. M3-10. $10(30 x) for X 30 where X is actual sales a. OLF 0 otherwise
a.
Z=
(area to the left of 12,000 0.80; from Appendix A, Z value for 0.80 0.84)
Thus,
0.84 =
b.
D=
0.84 3,000 3,571 6, 000 9, 000 3, 000 = = 0.84 b. Z = 3, 571 3, 571 Using Appendix A gives Z(0.84) 0.79955 1 0.79955 0.20045 Thus, P(loss) 0.20045 20.045% P(prot) 0.79955 79.955% c. EMV (P/U VC/U)() FC ($10 $4)(9,000) $36,000 $54,000 $36,000 $18,000 Thus,
X 45 30 = 30
0.5N(D) N(0.5) 0.1978
EOL KN(D) $10 30 0.1978 $59.34 c. EVPI EOL $59.34 M3-11. EOL K N(D) K $8, $10, or $15 30
D=
45 30 = 0.5 30
N(D) 0.1978 EOL if K $8 (8)(30)(0.1978) $47.47 EOL if K $10 (10)(30)(0.1978) $59.34 EOL if K $15 (15)(30)(0.1978) $89.01 Thus, as the loss per lamp increases, the expected opportunity loss increases.
REVISED
Z03_REND6289_10_IM_MOD3.QXD 5/15/08 8:57 PM Page 281
MODULE 3
DECISION THEORY
AND THE
NORMAL DISTRIBUTION
281
M3-12. a. New EMV ($28 $19)(35,000) $32,000 $283,000. Go ahead with new process. b. New EMV ($32 $20)(26,000) $16,000 $296,000. Increase selling price. Xb 350 200 D= = =1 150 N(D) 0.0833 EVPI EOL KN(D) $80 150 0.0833 $999.60 The most Joe would be willing to pay is $999.60. M3-14. EVPI EOL K N(D) $500 $100 50 N(D) N(D) 0.1; from OL tables, D 0.9 X b 5, 000 X b D= = Xb 4,955 50 Break-even point is 4,955 pumps. M3-15. 700 M3-17. M3-18.
N(D) 0.08332 EVPI EOL K N(D) $15 200 0.08332 $249.96 M3-16. 750; still 200
D=
M3-13.
1.25; N(D) decreased to 0.05059 EOL $15 0.05059 200 $151.77 Fixed cost $4,000, Prot per job $40. Break even point 4,000/40 100 jobs. The EVPI is equal to the minimum EOL. We use the formula EOL K N(D); K 80; 15; BEP 100
D=
N(1.33) 0.0427 EVPI EOL K N(D) $80 15 0.0427 51.24 M3-19. If the selling price increases to $150, the prot per job would increase to $70 and the break even point would be 4,000/70 57.14 units.
D=