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    Problem Solving Decision Analysis Problem No. 1

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    Mj Ong Pierson Garbo
    Kenneth Brown owns an oil company and must choose between purchasing one of three pieces of equipment to increase profits. This is a decision under uncertainty as there are multiple possible outcomes for each alternative. As an optimistic decision maker, Ken should use the maximax criterion to select the alternative with the highest potential profit. This leads Ken to choose the Sub 100 equipment, which has a potential profit of $300,000 in a favorable market. Phyllis Weinberger must advise on building a new manufacturing facility with three size options. She develops an opportunity loss table to find the minimax regret decision. The minimax regret decision is to build a medium-sized facility, as it has the lowest potential regret of $250,000

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    Problem Solving Decision Analysis Problem No. 1

    Uploaded by

    Mj Ong Pierson Garbo
    1K views2 pages
    Kenneth Brown owns an oil company and must choose between purchasing one of three pieces of equipment to increase profits. This is a decision under uncertainty as there are multiple possible outcomes for each alternative. As an optimistic decision maker, Ken should use the maximax criterion to select the alternative with the highest potential profit. This leads Ken to choose the Sub 100 equipment, which has a potential profit of $300,000 in a favorable market. Phyllis Weinberger must advise on building a new manufacturing facility with three size options. She develops an opportunity loss table to find the minimax regret decision. The minimax regret decision is to build a medium-sized facility, as it has the lowest potential regret of $250,000

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    GARBO Mark Ian_Decision Analysis

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    Kenneth Brown owns an oil company and must choose between purchasing one of three pieces of equipment to increase profits. This is a decision under uncertainty as there are multiple possible outcomes for each alternative. As an optimistic decision maker, Ken should use the maximax criterion to select the alternative with the highest potential profit. This leads Ken to choose the Sub 100 equipment, which has a potential profit of $300,000 in a favorable market. Phyllis Weinberger must advise on building a new manufacturing facility with three size options. She develops an opportunity loss table to find the minimax regret decision. The minimax regret decision is to build a medium-sized facility, as it has the lowest potential regret of $250,000

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views2 pages

    Problem Solving Decision Analysis Problem No. 1

    Uploaded by

    Mj Ong Pierson Garbo
    Kenneth Brown owns an oil company and must choose between purchasing one of three pieces of equipment to increase profits. This is a decision under uncertainty as there are multiple possible outcomes for each alternative. As an optimistic decision maker, Ken should use the maximax criterion to select the alternative with the highest potential profit. This leads Ken to choose the Sub 100 equipment, which has a potential profit of $300,000 in a favorable market. Phyllis Weinberger must advise on building a new manufacturing facility with three size options. She develops an opportunity loss table to find the minimax regret decision. The minimax regret decision is to build a medium-sized facility, as it has the lowest potential regret of $250,000

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    PROBLEM SOLVING

    Decision Analysis

    Problem No. 1

    Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken
    has been able to increase his annual salary by a factor of over 100. At the present time, Ken is forced to
    consider purchasing some more equipment for Brown Oil because of competition. His alternatives are
    shown in the following table:

    Equipment Favorable Market ($) Unfavorable Market ($)

    Sub 100 300,000 -200,000

    Oiler J 250,000 -100,000

    Texan 75,000 -18,000

    For Example, if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of
    $300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of $200,000. But Ken
    has always been a very optimistic decision maker.

    a. What type of decision is Ken facing?


    b. What decision criterion should he use?
    c. What alternative is best?

    SOLUTION:
    a. Type of decision is Ken facing.

    Ken is facing decision under uncertainty since there are several possible outcomes for each alternative,
    and the decision maker does not know the probabilities of the various outcomes.

    b. Decision criterion should he use.

    Since Ken is an optimistic decision maker, he should use the maximax criterion in order to find the
    alternative that maximizes the maximum payoff or the consequence for each alternative.

    c. Best alternative.

    Equipment Favorable Market Unfavorable Market Maximax or


    Optimistic
    Sub 100 300,000 -200,000 300,000
    Oiler J 250,000 -100,000 250,000
    Texan 75,000 -18,000 75,000

    The best alternative that Ken should choose is Sub 100 since it has the best possible outcome because the
    favorable market has the highest value.
    Problem No. 2

    Today’s Electronic specialized in manufacturing modern electronic components. It also builds the
    equipment that produces the components. Phyllis Weinberger, who is responsible for advising the
    president of Today’s Electronics on electronic manufacturing equipment, has developed the following
    table concerning a proposed facility:

    Profit ($)

    Strong Market Fair Market Poor Market

    Large facility 550,000 110,000 -310,000

    Medium-sized facility 300,000 129,000 -100,000

    Small facility 200,000 100,000 -32,000

    No facility 0 0 0

    a. Develop an opportunity loss table.


    b. What is the minimax regret decision?

    SOLUTION:

    A. Opportunity loss table.

    Opportunity Loss Table


    Minimax
    Alternatives Strong Market Fair Market Poor Market
    Target
    Large Facility 550,000 – 129,000 – 110,000 0 – (310,000) = 310,000
    550,000 = 0 = 19,000 310,000
    Medium-sized 550,000 – 129,000 -129,000 = 0 – (-100,000) = 250,000
    Facility 300,000 = 0 100,000
    250,000
    Small Facility 550,000 – 129,000 – 100,000 0 – (-32,000) = 350,000
    200,000 = = 29,000 32,000
    350,000
    No Facility 550,000 – 0 = 129,000 – 129,000 0 – (0) = 0 550,000
    550,000

    B. The minimax regret decision.

    - Medium-sized Facility has the least minimax target as shown in the opportunity loss
    table, therefore, the minimax regret decision to build a medium-sized facility.

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