MA96 Problem: Expected Values (Payoff Tables) - The Gallant Company

MA96 Problem: Expected Values (Payoff Tables) - The Gallant Company

The Gallant Company manufactures a unique thermostat that yields dramatic cost savings from effectiveclimatic control of large buildings. The efficiency of the thermostat is dependent upon the quality of aspecialized thermocoupler. These thermocouplers are purchased from Braun Company for $15 each.Since early 20x3, an average of 10% of the thermocouplers purchased from Braun have not met Gallant'squality requirements. The number of unusable thermocouplers has ranged from 5% to 25% of the totalnumber purchased and has resulted in failures to meet production schedules. In addition, Gallant hasincurred additional costs to replace the defective units because the rejection rate of the units is within therange agreed upon in the contract.Gallant is considering a proposal to manufacture the thermocouplers. The company has the facilities andequipment to produce the components. The Engineering Department has designed a manufacturingsystem that will produce the thermocouplers with a defective rate of 4% of the number of units produced.The following schedule presents the engineer's estimates of the probabilities that different levels of variable manufacturing cost per thermocoupler will be incurred under this system. Additional annualfixed costs incurred by Gallant if it manufactures the thermocoupler will amount to $32,500.

 Estimated Variable

 Manufacturing Cost Per 

 Probability Of 

Thermocoupler Unit 

Occurrence

$10

0.1

12

0.3

14

0.4

16

0.2

Gallant Company will need 18,000 thermocouplers to meet its annual demand requirements.

 Required – 

Prepare an expected value analysis to determine whether Gallant Company should manufacture thethermocouplers