The Gorman Manufacturing Company must decide whether to purchase a component part from a supplier or to manufacture the component at its own plant. If demand is high, it would be to Gorman’s advantage to manufacture the component. If demand is low, however, Gorman’s unit manufacturing cost will be high because of underutilization of equipment. The projected profits (in thousands of dollars) under each demand level are as follows:
Demand
Decision Low Medium High
Manufacture component $220 $40 $100
Purchase component $210 $45 $70
1. Determine the best decisions using the maximax, maximin, and opportunity loss decision criteria.
2. Assume that the best estimate of the probability of low demand is 0.35, the probability of medium demand is 0.35, and the probability of high demand is 0.30. What is the best decision using the expected value criterion?