Determine the expected cost with perfect information

Reference no: EM13176988

Zingtronics Corp. has completed the design of a new graphic-display unit for computer systems and is about to decide on whether it should produce one of the major components internally or subcontract it to another local firm. The advisability of which action to take depends on how the market will respond to the new product. If demand is high, then it is worthwhile to make the extra investment for special facilities and equipment needed to produce the component internally. For low demand, it is preferable to subcontract. The analyst assigned to study the problem has produced the following information on costs (in thousands of dollars) and probability estimates of future demand for the next 5 -year period:

Future Demand
Action Low Average High
Produce $140 $120 $90
Subcontract $100 $110 $160
Probability 0.10 0.60 0.30

a) Prepare a decision tree that describes the structure of this problem.
b) Select the best action on the basis of the initial probability estimates for future demand.
c) Determine the expected cost with perfect information (I,e knowing future demand exactly).

Reference no: EM13176988

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