AC Company Practice Exercise Mngmt Sci PDF

Preview

Summary

Practice Exercises Management Science Bachelor of Science in Accountancy...

Description

Exercise #1 Even though independent gasoline stations have been having a difficult time, AC Company has been thinking about starting their own independent gasoline station. The company’s problem is to decide how large the station should be. The monthly returns will depend on both the size of the station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, AC Company developed the following profit payoff table, as well as the probabilities of each long-term demand level. Size of station

Good market

Fair market

Poor market

Small

550,000

220,000

50,000

Medium

820,000

330,000

0

Large

1,150,000

330,000

(420,000)

Very Large

3,700,000

280,000

(1,200,000)

Probabilities

0.25

0.35

0.40

Using the following approaches, complete the table below and state the decision that the AC Company should take.

Payoff Table: 1. Maximax/optimistic Approach Size of station Good market Fair market

Poor market

Maximax/optimistic

Small

550,000

220,000

50,000

550,000

Medium

820,000

330,000

0

820,000

Large

1,150,000

330,000

(420,000)

1,150,000

Very Large

3,700,000

280,000

(1,200,000)

3,700,000

Decision is to invest in a very large size of station. 2. Maximin/Conservative Approach Size of station Good market

Fair market

Poor market

Maximin/conservative

Small

550,000

220,000

50,000

50,000

Medium

820,000

330,000

0

0

Large

1,150,000

330,000

(420,000)

(420,000)

Very Large

3,700,000

280,000

(1,200,000)

(1,200,000)

Decision is to invest in a small size of station. 3. Minimax Regret Approach Size of station Good market Fair market Poor market Small

550,000

220,000

50,000

Medium

820,000

330,000

0

Large

1,150,000

330,000

(420,000)

Very Large

3,700,000

280,000

(1,200,000)

Size of station Good market Fair market Poor market

Minimax

Small

3,150,000

110,000

0

3,150,000

Medium

2,880,000

0

50,000

2,880,000

Large

2,550,000

0

470,000

2,550,000

Very Large

0

50,000

1,250,000

1,250,000

Decision is to invest in a very large size of station. 4. Expected (Monetary) Value Approach Size of station Good market

Fair market

Poor market

Expected Value w/o PI

Small

550,000

220,000

50,000

234,500

Medium

820,000

330,000

0

320,500

Large

1,150,000

330,000

-420,000

235,000

Very Large

3,700,000

280,000

-1,200,000

543,000

0.25

0.35

0.40

Probabilities

Small = (550,000x0.25) + (220,000x0.35) + (50,000x0.40) = 234,500 Medium = (820,000x0.25) + (330,000x0.35) + (0x0.40) = 320,500 Large = (1,150,000x0.25) + (330,000x0.35) + (-420,000x0.40) = 235,000 Very Large = (3,700,000x0.25) + (280,000x0.35) + (-1,200,000x0.40) = 543,000 Decision is to invest in a very large size of station.

5. Expected Value of Perfect Information Expected Value With Perfect Information Solution: = (3,700,000x0.25) + (330,000x0.35) + (50,000x0.40) = 925,000 + 115,500 + 20,000 = 1,060,500 Expected Value of Perfect Information = EVwPI – EvwoPI Expected Value of Perfect Information =1,060,500 – 543,000 Expected Value of Perfect Information = 517,500

Maximax/ Optimistic

Maximin/ Conservative

Good market

Fair market

550,000

50,000

550,000

220,000

820,000

0

820,000

330,000

1,150,000

-420,000

1,150,000

330,000

3,700,000

-1,200,000

3,700,000

280,000

Decision: very large

Decision: small

Expected Value w/o PI 234,5 50,000 3,150,000 00 320,5 0 2,880,000 00 235,0 -420,000 2,550,000 00 543,0 -1,200,000 1,250,000 00 Decision: very Decision: very large large Poor market

Minimax Regret

How much would AC Company’s profits increase if it could access information that will be helpful in its operation? It’s profit would increase for about 517,500 if it has access to information that will be helpful in its operation. Construct the decision tree (here or at the back)...