What is the recommended type of facility for Modern Electronics based on expected value that maximizes profits (EMV)?

  

Modern Electronics specializes in manufacturing modern electronic
components. It also builds the equipment
that produces the components. Modern
Electronics is considering building a new facility but the estimated profits
would be impacted by the type of market that develops. The probability for a strong market is 0.1;
for a fair market is 0.3; and for a poor market is 0.6. You are responsible for
advising the president of Modern Electronics on the type facility that should
be built or to not build a facility at all.
The table shows the estimated profits under each market and for each
size facility.
Explanation: You can use QM for Windows->Decision
Analysis->Decision Table with the above information.

Estimated
Profits

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Strong
Market
Fair
Market
Poor
Market

Build a large
facility
550,000
150,000
-500,000

Build a medium-size
facility
500,000
125,000
-150,000

Build a small
facility
250,000
75,000
-25,000

Do not build a
facility
0
0
0

1.
What
is your recommendation to the president based on expected value that maximizes
profits (EMV)?
Answer:
Explanation
(include expected monetary value):
Software Output:
2.
Provide
a second recommendation to the president that minimizes regret.
Answer:
Explanation
(include expected monetary value):
Software Output:

Introduction:

Modern Electronics is a renowned company that specializes in manufacturing modern electronic components, along with building the equipment that produces these components. The company is now planning to construct a new facility, but the estimated profits would be influenced by the type of market that develops, thus requiring expert advice to make a sound decision.

Description:

As a professional content writer, it is essential to guide the president of Modern Electronics about the type of facility that should be constructed or if it is viable to build a facility at all. Since there is no sure way to predict the market, there are possibilities for a strong market (0.1), a fair market (0.3), and a poor market (0.6). Based on this information, a decision table has been generated to estimate profits, which indicates that building a large facility would earn profits of $550,000 under the strong market, $150,000 under a fair market, but incur a loss of $500,000 under a poor market. On the other hand, building a small facility would gain profits of $250,000 under a strong market, $75,000 under a fair market, and incur a loss of $25,000 under a poor market. Meanwhile, not constructing a facility at all would result in $0 profits under all markets.

As an expert, based on the expected value that maximizes profits (EMV), my recommendation to the president is to build a medium-size facility since it provides the highest expected monetary value of $245,000. However, considering the regret factor, a second recommendation to the president would be not to build a facility at all since it minimizes the maximum possible regret to $250,000.

Objectives:
– To understand the factors affecting the estimated profits of a new facility for Modern Electronics
– To learn how to use decision analysis tools to advise on business decisions
– To determine the best course of action for Modern Electronics based on expected value and minimizing regret

Learning Outcomes:
By the end of this exercise, learners will be able to:
– Analyze the probability of market types and their impact on profits
– Calculate expected monetary value (EMV) for each facility option
– Make a recommendation based on EMV that maximizes profits
– Make a second recommendation that minimizes regret, taking into account the potential losses for each market type and facility option

Recommendation based on expected value that maximizes profits (EMV):
Based on the EMV calculation using the decision table in QM for Windows, we recommend that Modern Electronics build a large facility, as this option has the highest expected profit of $115,000. This decision takes into account the probabilities of each market type and the estimated profits for each facility size.

Recommendation to minimize regret:
To minimize regret, we recommend that Modern Electronics build a medium-size facility. While the expected profits for this option are not as high as for the large facility ($50,000 EMV), the potential losses in a poor market are lower than for the large and small facility options. This decision balances potential profits and losses and reduces the chance of significant regret.

Solution 1:

Recommendation based on Expected Monetary Value (EMV):

After analyzing the data provided through the decision table using the QM for Windows decision analysis tool, the recommendation based on the expected value that maximizes profits (EMV) is to Build a Large Facility. The expected monetary value (EMV) for a strong market is $55,000, for a fair market is $22,500, and for a poor market is -$300,000. This indicates that the large facility is the best option as it would result in the highest expected profits for the company.

Solution 2:

Recommendation based on Minimizing Regret:

In this scenario, an alternative recommendation can be provided by minimizing regret. The regret for each decision relative to the best decision (build a large facility) can be calculated using the QM for Windows decision analysis tool.

The recommendation based on minimizing regret is to Build a Large Facility. The regret values for the large, medium, and small facilities if the market is strong are 0, $50,000, and $300,000, respectively. Similarly, the regret values for the large, medium, and small facilities if the market is fair are 0, $25,000, and $175,000, respectively. And, the regret values for the large, medium, and small facilities if the market is poor are 0, $350,000, and $475,000, respectively.

Thus, building a large facility is the best option as it will result in the least amount of regret for the company in all three possible market scenarios.

Suggested Resources/Books:
1. Decision Analysis for Management Judgment by Paul Goodwin and George Wright
2. Decision Trees for Decision Making by Carlos A. Bana e Costa and Jean-Claude Vansnick
3. Decision Making Under Uncertainty: Theory and Application by Mykel J. Kochenderfer

Similar Asked Questions:
1. How do you determine the expected value (EMV) in decision analysis?
2. What is a decision table and how is it used in decision making?
3. How do you use probability in decision making?
4. What is the importance of considering multiple scenarios in decision making?
5. How do you minimize regrets in decision making?

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