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If Ed​ Lusk, VP for​ operations, proceeds with the existing prototype​ (option a), the firm can expect sales to be units at ​$ ​each, with a probability of and a probability of at ​$. ​If, however, he uses the value analysis team​ (option b), the firm expects sales of units at ​$​, with a probability of and a probability of units at ​$. Value​ engineering, at a cost of ​$​, is only used in option b. Which option has the highest expected monetary value​ (EMV)?

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Answer:

OPTION B

Explanation:

Calculation for the option that has the highest expected monetary value (EMV)?

Using this formula to find the Expected monetary value for option a

E(X) = x*P(X=x)

Let plug in the formula

Expected monetary value = 0.6*(100,000*550) + 0.4*(75,000*550)

Expected monetary value=0.6*55,000,000+0.4*41,250,000

Expected monetary value=33,000,000+16,500,000

Expected monetary value = $49,500,000

Therefore the Expected monetary value for option a is $49,500,000

Calculation for the Expected monetary value

for option b

Expected monetary value = 0.7*(75,000*750) + 0.3*(70,000*750)

Expected monetary value=0.7*56,250,000+0.3*52,500,000

Expected monetary value=39,375,000+15,750,000

Expected monetary value= 55,125,000

Therefore the Expected monetary value for option b is 55,125,000

Hence, Based on the above calculations for both option a and option b the highest expected monetary value will be OPTION B reason been that OPTION B has the highest amount.

So clearly the Option b has the highest expected monetary value.PRFS 4703 Exam 2Spring 2011

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