case study

A plant manager is about to commence an urgent above normal production

run. To assure meeting the desired production rate, she has decided to transfer

and incorporate into the production line a piece of equipnient from another

line at a cost of $5000. The manager is considering whether to overhaul this

equipment before placing it in the new production line. The piece of equipment costs $800 to overhaul, whereas if she incorporates

the item into the process line and it then breaks down it will cost $1500 to cover

the cost of repair and lost time. The manager estimates that there is a 66 percent

chance that the equipment motor is reliable but is assured that it will be reliable

if it is overhauled. A dynamometer test of the motor costs $100 but will only

indicate whether the motor is in good or bad condition with a 10 percent chance

that the test results prove invalid. The manager estimates that there is a 70

percent chance that the dynamometer test will indicate a reliable motor.

(a) Model the decision problem faced by the plant manager.

(b) If the plant manager wishes to base her decision on an EMV policy, what

should be her optimum strategy?