Silverstone Tire co., a tire manufacturer, wants to select one of three feasible prototype designs for a new longer-wearing radial tire. The costs of making the tires follow:
Tire Fixed Cost ($) Variable Cost per Unit ($)
A 60,000 30
B 90,000 20
C 120,000 15
There are three levels of unit sales: 4000 units, 7,000 units and 10,000 units; the respective probabilities are 0.30, 0.50 and 0.2. The selling price will be $75 per tire.
I. Construct the payoff table.
II. Determine the expected payoff for each act. According to the Bayes decision rule, which is the best act?
III. Calculate EVPI.
IV. Complete the opportunity loss table and compute the expected opportunity losses. Then, determine the optimal expected opportunity loss.