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Expected cost of checking the valve

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Reference no: EM132203276

Bilco Oil Company currently sells three grades of gasoline:regular, premium and "regular plus", which is a mixture of regular and premium. "Regular plus" is advertised as being "at least 50% premium". Although any mixture containing 50% or more premium gas could be sold as "regular plus", it is less costly to use exactly 50%. The percentage of premium gas in the mixture is determined by one small valve in the blending machine. If the valve is properly adjusted, the machine provides a mixture which is 50% premium and 50% regular. Assume that if the valve is out of adjustment the machine provides a mixture which is 60% premium and 40% regular.

Once the machine is started it must continue until 100,000 gallons of "regular plus" have been mixe. Cost data available:

Cost per gallon: Premium $0.32

Cost per gallon:Regular $0.30

Cost of checking the valve $80

Cost of adjusting the valve $40

Subjective estimates of the probabilities of the valve's condition are estimated to be:

Event Probability

Valve in adjustment 0.7

Valve out of adjustment 0.3

1)The expected cost of checking the valve and adjusting it if necessary would be?

2) The conditional cost of not checking the valve when it is out of adjustment would be?

Reference no: EM132203276

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