Question: Chung Manufacturing is considering the introduction of a family of new products. Long-term demand for the product group is somewhat predictable, so the manufacturer must be concerned with the risk of choosing a process that is inappropriate. Chen Chung is VP of operations. He can choose among batch Manufacturing or custom manufacturing, or he can invest in-group technology. Chen won’t be able to forecast demand accurately until after he makes the process choice. Demand will be classified into four compartments: poor, fair, good and excellent. The table below indicates the payoffs (profits) associated with each process/demand combination, as well as the probabilities of each long-term demand level.

Poor Fair Good Excellent

Probability .1 .4 .3 .2

Batch -$200,000 $1,000,000 $1,200,000 $1,300,000

Custom $1,000,000 $3,000,000 $7,000,000 $8,000,000

Group Technology -$1,000,000 -$5,000,000 $5,000,000 $2,000,000

a) Based on expected value, what choice offers the greatest gain?

b) What would Chen Chung be willing to pay for a forecast that would accurately determine the level of demand in the future?