Suppose a manufacturing plant is considering three options for expansion. The first one is to expand into a new plant (large), the second to add on third-shift to the daily schedule (medium), and the third to do nothing (small). There are three possibilities for demand. These are high, medium, and low with the probability of .5 (H), .25 (M), .25 (L) of occurring. Suppose that the profits for the expansion plans are as follows (respective to high, medium, low demand). The large expansion profits are $100000, $10000, -$10000, the medium expansion choice $40000, $40000, $5000 and the small expansion choice $15000, $15000, $15000.

a. what is the highest emv?

b. which of the expansion plans should the manager choose?

a. Large expansion Expected Monetary Value (EMV) of $50,000 is the largest.

b. Large expansion

Explanation:

a. what is the highest emv?

Large expansion Expected Monetary Value (EMV) = ($100,000 × 0.50) + ($10,000 × 0.25) - ($10,000 × 0.25)  = $50,000

Medium expansion EMV = ($40,000 × 0.50) + ($40,000 × 0.25) + ($5,000 × 0.25)  = $31,250

Small expansion EMV = ($15000 × 0.50) + ($15,000 × 0.25) + ($15,000 × 0.25)  = $15,000

Large expansion Expected Monetary Value (EMV) of $50,000 is the largest.

b. which of the expansion plans should the manager choose?

Since the large expansion should be chosen by the manager since it has the highest EMV of  $50,000.

(A) The highest EMV is of large expansion = 50000

(B) The manager should choose large expansion plan since it provides highest EMV.

Explanation:

The expected monetary value(EMV) is how much money you can expect to make from a certain decision. To calculate EMV, multiply the dollar value of each possible outcome by each outcome's chance of occurring (percentage), and total the results.

(A)

EMV of Large expansion = (0.50 × 100,000) + ( 0.25 × 10000) - ( 0.25 ×  10000)  = 50,000

EMV of Medium expansion = ( 0.50 × 40000) + ( 0.25 × 40000) + ( 0.25 ×  5000)  = 31,250

EMV of Small Expansion = ( 0.50 × 15000 ) + ( 0.25 × 15000 ) + ( 0.25 ×  15000 )  = 15,000

⇒ The highest EMV is of large expansion = 50000

(B)

The manager should choose large expansion plan since it provides highest EMV.

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