Using the conservative approach, the solution that seems to have the lowest risks is to outsource the production to an outside vendor in Taiwan. The profits forecasts are more homogeneous by choosing that option. Even if this option cannot lead us to the highest profit possible, the profit will be positive in any cases (high or low demand).
Using the optimistic approach, we consider that the high level of demand has good chance to occur. Then the highest level of profit is reach by choosing to manufacture the "Zeeble". So that would be the optimistic choice.
EMV manufacture = (125000 x 0.3) + (40000 x 0.35) + (-30000 x 0.35) = 41000
EMVoutsourcing = (70000 x 0.3) + (45000 x 0.35) + (10000 x 0.35) = 40250
Using the EMV, the strategy would be to manufacture the toy
Given the previous answers and our business judgment, we would advise to Elizabeth Wallace to outsource the production of the toy. By outsourcing, there are no possible negative payoffs and the expected monetary values are quite close to each other. By outsourcing the EMV would be 40.25 while it would be 41 by manufacturing the toy. The EMV is quite similar whereas the projected profit is less risky by outsourcing. The probability of the demand change must be taken in account. If the probability for a high demand increases, so the decision could change. If a new Disney film is launched and has a link with the toy, so the demand could increase.
[...] In the best case, th costs would be 500, which is the second smallest value. By outsourcing, Michelle would take too much risk. And by hiring in-house, Michelle couldn't spend less than 600,000€ in the best case. If the probabilities for the low, medium, and high demand change to and the choice will change as well. EMV in house = ( 0.3 x 650000) + ( 0.2 x 650000) + ( 0.5 x 600000) = 625000 EMV to outsource = ( 0.3 x 900000) + ( 0.2 x 600000) + ( 0.5 x 300000)=540000 EMV combinaison = ( 0.3 x 800000) + ( 0.2 x 650000) + ( 0.5 x 500000)=620000 I would prefer to outsource because the probability of low demand is higher. [...]
[...] There are fewer risks to lose money if the probability for low demand is higher. After having done some research, we estimate the cost values for the in-house staff at 700,000€ for a high demand, 680,000€ for a medium demand and 650,000€ for a low demand. EMV in house = ( 0.3 x 700000) + ( 0.2 x 680000) + ( 0.5 x 650000) = 875000 A small increase of each cost values lead to a large increase of the EMV, which is totally logical. [...]
[...] It seems to be the less risky option. We have a good idea of what to expect. Using the optimistic approach, the strategy would be to outsource because there is the possibility to reduce the costs until 300,000€, which is the lower possible value. EMV in house = ( 0.2 x 650000) + ( 0.5 x 650000) + ( 0.3 x 600000) = 635000 EMV to outsource = ( 0.2 x 900000) + ( 0.5 x 600000) + ( 0.3 x 300000)=570000 EMV combinaison = ( 0.2 x 800000) + ( 0.5 x 650000) + ( 0.3 x 500000)=635000 According to the EMVs, the strategy would be to outsource to vendor. [...]
[...] According to the EVSI, Piven Production shouldn't hire the consultant because this charge will enlarge the gap between the expected earnings by hiring the consultant or not. In other words, the EVSI would be 35430 if Piven Production hires the consultant. It would be more profitable to do not hire the consultant. I would recommend selling the rights to Warner and not producing the pilot. By selling the rights we are sure of the revenues while by producing the pilot, there are more risks of loss. Linear Programming A. Setting up the Linear Program Wallace Toys, Inc. [...]
[...] In other words, the fancy shoe requires 4minute of injection-molding, the casual shoe requires 3 minutes and the amount of shoes that have passed this step cannot exceed more than 600 minutes of injection molding of production. [...]
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