PLE Case Chapter 13 Department Stamping Drilling Assembly Painting Packaging Hours per unit Hours per unit Mower Housings Tractor Housings Production...

3.

Suppose that a car-rental agency offers insurance for a week that costs $75. A minor fender bender will cost $2,000, whereas a major accident might cost $16,000 in repairs. Without the insurance, you would be personally liable for any damages. What should you do? Clearly, there are two decision alternatives: take the insurance, or do not take the insurance. The uncertain consequences, or events that might occur, are that you would not be involved in an accident, that you would be involved in a fender bender, or that you would be involved in a major accident. Develop a payoff table for this situation. What decision should you make using each strategy?

a. aggressive strategy

b. conservative strategy

c. opportunity-loss strategy

6.

For the car-rental situation in Problem 3, compute the standard deviation of the payoffs for each decision. What does this tell you about the risk in making the decision?

9.

For the DoorCo Corporation decision in Problem 2, suppose that the probabilities of the three scenarios are estimated to be 0.15, 0.40, and 0.45, respectively. Find the best expected value decision.

10.

For the car-rental situation described in Problem 3, assume that you researched insurance industry statistics and found out that the probability of a major accident is 0.05% and that the probability of a fender bender is 0.16%. What is the expected value decision? Would you choose this? Why or why not?

12.

For the car-rental decision in Problems 3 and 10 construct a decision tree and compute the rollback values to find the best expected value decision.

13.

For the car-rental decision in Problems 3 and 10, suppose that the cost of a minor fender bender is normally distributed with a mean of $2000 and standard deviation of $100, and the cost of a major accident is triangular with a minimum of $10,000, maximum of $25,000, and most likely value of

$16,000. Use Analytic Solver Platform to simulate the decision tree and find the distribution of the expected value of not taking the insurance.

20.

Dean Kuroff started a business of rehabbing old homes. He recently purchased a circa-1800 Victorian mansion and converted it into a three-family residence. Recently, one of his tenants complained that the refrigerator was not working properly. Dean’s cash flow was not extensive, so he was not excited about purchasing a new refrigerator. He is considering two other options: purchase a used refrigerator or repair the current unit. He can purchase a new one for $400, and it will easily last 3 years. If he repairs the current one, he estimates a repair cost of $150, but he also believes that there is only a 30% chance that it will last a full 3 years and he will end up purchasing a new one anyway. If he buys a used refrigerator for $200, he estimates that there is a 0.6 probability that it will last at least 3 years. If it breaks down, he will still have the option of repairing it for $150 or buying a new one. Develop a decision tree for this situation and determine Dean’s optimal strategy.

approximates a Triangular Distribution with a Min = -$400, Likely = -$150, and a Max = -$100.

One of PLE’s manufacturing facilities produces metal engine housings from sheet metal for both mowers and tractors. Production of each product consists of five steps: stamping, drilling, assembly, painting, and packaging to ship to its final assembly plant. The production rates in hours per unit and the number of production hours available in each department are given in the following table: