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Exam 5: Strategic Capacity Planning for Products and Services

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Question 1

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A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. The decision maker has discovered a firm that will, for a fee of $1,000, make her position-risk free. How much better off will her firm be if she takes this firm up on its offer?

A) $5,000
B) $4,000
C) $3,000
D) $2,000
E) $1,000

F) A) and E)
G) A) and B)

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Question 2

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The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: If he uses the minimax regret criterion, which alternative will he decide to select?

A) do nothing
B) expand
C) build new
D) either do nothing or expand
E) either expand or build new

F) C) and D)
G) A) and E)

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Question 3

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The advertising manager for Roadside Restaurants, Inc., needs to decide whether to spend this month's budget for advertising on print media, television, or a mixture of the two. She estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the success of the new cable television network she plans to use, as follows: For what range of probability that the new cable network will be successful will she select the print media strategy?

Consider the following decision scenario: *PV for profits ($000) The maximin strategy would be:

Doctor J. is considering purchasing a new blood analysis machine to test for HIV; it will cost $60,000. He estimates that he could charge $25.00 for an office visit to have a patient's blood analyzed, while the actual cost of a blood analysis would be $5.00. If this new blood analysis machine has design and effective capacities of 6,000 and 5,000 blood analyses per year, respectively, and Dr. J. expects to be 80 percent efficient in his use of this machine, how many HIV blood analyses does he plan to perform each year?

The ratio of actual output to design capacity is:

The impact that a significant change in capacity will have on a key vendor is a:

A decision maker's worst option has an expected value of $2,550, and the decision maker's best option has an expected value of $4,750. With perfect information, the expected value would be $6,000. What is the expected value of perfect information?

The advertising manager for Roadside Restaurants, Inc., needs to decide whether to spend this month's budget for advertising on print media, television, or a mixture of the two. She estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the success of the new cable television network she plans to use, as follows: For what range of probability that the new cable network will be successful will she select the mixed media strategy?

The advertising manager for Roadside Restaurants, Inc., needs to decide whether to spend this month's budget for advertising on print media, television, or a mixture of the two. She estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the success of the new cable television network she plans to use, as follows: If she uses the maximin criterion, which advertising strategy will she use?

Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made.

Two professors at a nearby university want to coauthor a new textbook in either economics or statistics. They feel that if they write an economics book, they have a 50 percent chance of placing it with a major publisher, and it should ultimately sell about 40,000 copies. If they cannot get a major publisher to take it, then they feel they have an 80 percent chance of placing it with a smaller publisher, with ultimate sales of 30,000 copies. On the other hand, if they write a statistics book, they feel they have a 40 percent chance of placing it with a major publisher, and it should result in ultimate sales of about 50,000 copies. If they cannot get a major publisher to take it, they feel they have a 50 percent chance of placing it with a smaller publisher, with ultimate sales of 35,000 copies. What is the expected value for the decision alternative to write the statistics book?

Utilization is defined as the ratio of effective capacity to design capacity.

Determining the average payoff for each alternative and choosing the alternative with the highest average is the approach called:

A decision tree is:

Which one of these is not used in decision making under risk?

In cost-volume analysis, costs that vary directly with volume of output are referred to as fixed costs because they are a fixed percentage of output levels.

Given the following information, what would efficiency be? Effective capacity = 50 units per day Design capacity = 100 units per day Actual output = 30 units per day

One local hospital has just enough space and funds currently available to start either a cancer or heart research lab. If administration decides on the cancer lab, there is a 20 percent chance of getting $100,000 in outside funding from the American Cancer Society next year, and an 80 percent chance of getting nothing. If the cancer research lab is funded the first year, no additional outside funding will be available the second year. However, if it is not funded the first year, then management estimates the chances are 50 percent it will get $100,000 the following year, and 50 percent that it will get nothing again. If, however, the hospital's management decides to go with the heart lab, then there is a 50 percent chance of getting $50,000 in outside funding from the American Heart Association the first year and a 50 percent chance of getting nothing. If the heart lab is funded the first year, management estimates a 40 percent chance of getting another $50,000 and a 60 percent chance of getting nothing additional the second year. If it is not funded the first year, then management estimates a 60 percent chance for getting $50,000 and a 40 percent chance for getting nothing in the following year. For both the cancer and heart research labs, no further possible funding is anticipated beyond the first two years. What is the expected value for the decision alternative to select the cancer lab?

The owner of a greenhouse and nursery is considering whether to spend $6,000 to acquire the licensing rights to grow a new variety of rosebush, which she could then sell for $6 each. Per-unit variable cost would be $3. How many rosebushes would she have to produce and sell in order to break even?