MGT 2070 Assignment #3 – Solutions
5.13 The product planning group at Hawkes Electric Supplies, Inc., has determined that it needs to design a new
series of switches. It must decide upon one of three design strategies. The market forecast is for 200,000 units. The
better and more sophisticated the design strategy and the more time spent on value engineering, the less will be the
variable cost. The chief of engineering design, Dr. Gerry Johnson, has decided that the following costs are a good
estimate of the initial and variable costs connected with each approach. These are:
a) Low-tech: a low-technology, low-cost process consisting of hiring several new junior engineers. This option has a
cost of $45,000 and variable cost probabilities of .2 for $.55 each, .5 for $.50, and .3 for $.45.
b) Subcontract: a medium-cost approach using a good outside design staff. This approach would have an initial cost
of $65,000 and variable cost probabilities of .7 of $.45, .2 of $.40, and .1 of $.35.
c) High-tech: a high-technology approach using the very best of the inside staff and the latest computer-aided
design technology. This approach has a fixed cost of $75,000 and variable cost probabilities of .9 of $.40 and .1 of
$.35.
What is the best decision based on an expected monetary value (EMV) criterion? (Note: We want the lowest EMV as
we are dealing with costs in this problem.)
Immediately upon seeing the words “EMV” you should think “decision tree” (a decision table will be overly
complex due to the several different probabilities). There is one decision to be made (which approach to use) and we
want to pick the approach that gives us the lowest total costs. Total cost = fixed costs + quantity x variable cost:
Low Tech
$144,000
Sub-contract
$151,000
High-Tech
$154,000
Probability
Fixed
Cost ($)
Quantity
Variable
Cost ($)
0.2
0.5
0.3
0.7
0.2
0.1
0.9
0.1
45,000 +
45,000 +
45,000 +
65,000 +
65,000 +
65,000 +
75,000 +
75,000 +
200,000 x
200,000 x
200,000 x
200,000 x
200,000 x
200,000 x
200,000 x
200,000 x
0.55 =
0.50 =
0.45 =
0.45 =
0.40 =
0.35 =
0.40 =
0.35 =
Total
Cost
($)
155,000
145,000
135,000
155,000
145,000
135,000
155,000
145,000
EMV (Low-Tech) = 0.2 ($155,000) + 0.5 ($145,000) + 0.3 ($135,000) = $144,000
EMV (Sub-Contract) = 0.7 ($155,000) + 0.2 ($145,000) + 0.1 ($135,000) = $151,000
EMV (High-Tech) = 0.9 ($155,000) + 0.1 ($145,000) = $154,000
Since the question tells us to select the option with the lowest EMV, we will go with the Low-Tech solution.
S6.1 The overall average on a process you are attempting to monitor is 75 units. The process standard deviation is
1.95, and the sample size is n = 10. What would be the upper and lower control limits for a 3-sigma control chart?
n = 10, x = 75,  = 1.95, z = 3
 
 1.95 
x  z
  75  3
 = 76.85
 n
 10 
 
 1.95 
LCL = x  z 
  75  3
 = 73.15
 n
 10 
UCL =
7.21 Tom Miller and Jeff Vollmann have opened a copy service on Commonwealth Avenue. They estimate their fixed
cost at $12,000 and their variable cost of each copy sold at $.01. They expect their selling price to average $.05.
a) What is their break-even price in dollars?
Price (P)
Variable Cost (V)
Fixed Cost (F)
BEP$ =
= $0.05 / unit
= $0.01 / unit
= $12,000
F
12,000

= $15,000
V
0.01
1
1
P
0.05
b) What is their break-even point in units?
BEPx =
F
12,000

= 300,000 units
P  V 0.05  0.01
Assignment #4
Due: Thursday August 2
In approximately 500 words, answer the following question:
Using what you learned on your tour of the Big Rock plant, how has the company answered one of the following
critical decisions of Operations Management:
a) Service and Product Design;
b) Quality Management;
c) Process and Capacity Design;
d) Location; or
e) Layout.
Your answer must identify which of the above decisions you have chosen to comment on. It should relate concepts
from the text and lectures to what you learned during the plant tour.