Problem: In a production operation of an electronics firm, a company manufactures I/O circuit chips that is used in a final assembly process. The chips, manufactured in batches sizes are either good (G) or defective (B).

Historical data indicates that P(G) = .8 and P(B)=.2

The company has the following options:

Send the batch, "as is," onto the final production assembly

It costs $1,000 to send good parts onto production and $4,000 to send bad parts to final production (due to rework)

Rework all chips (once reworked, all chips are good)

It cost $2,000 to rework chips

The company also has the option of performing inspection on a single chip in the batch to determine if it is defective or not defective

• It cost $100 to test a chip
• The following relates to the test results
• Out come of the test is either defective chip (D) or not defective chip (ND)
• P(D/G) = .1 therefore. P(ND/G) = .9
• P(D/B) = .5 therefore, P(ND/B) = .5

Determine the company’s best decision strategy based on probability assessment and costs. Also Calculate EVSI, EVPI and Efficiency

Additional info:

Maybe this will help. You always have to send a batch of chips to production. You have two options (not considering any test or survey information). You either send a good batch to production, this cost $1,000. Or you send a bad batch to production, this cost $4,000. The reason it cost $4,000 is that you wind up reworking the chips, but all you need to know is that it cost $4,000 when bad chips get sent to production.

Now, there is another option you can employee, again not considering any test data. You can elect to rework chips not knowing if they are good or bad. This option cost $2,000. (Note, on the slide this cost says $1,000, it should be $2,000). I’ll correct the slide and repost today)

So these are all the decisions you have without any testing.

There is a survey option you can employ. It cost $100 to employee this option. What is involved with this option is that you can test a batch of chips. The test results will either be "defective" and not "defective." Following these results, you have the same three options from above (rework chips and send to production (at a cost of $2,000), or send a bad batch of chips at a cost of $4,000 or send a good batch of chips to production at a cost of $1,000

Price: $7.21

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