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Could you please be so kind to help me with the following.
Company produces cool systems but 25% of production is defective. Unit contribution is $40/ unit. Refund is $60 if customer finds it defective. Company may take a decision to rework for $30 all the units regardless of weather defective or not. It can not know which of them defective or not in advance.Consultant Engineer made a test using 100 systems on a sample. Results are:
1)Test result :Positive
system in good condition :52. 5
system defective:2. 5
2)Test result:Inconclusive
system in good condition:15
system defective:7. 5
3)Test result:Negative
system in good condition:7. 5
system defective: 15REQUIRED:USING DECISION TREE, ESTABLISH THE MAXIMUM PRICE (PER SYSTEM)THE COMPANY SHOULD BEWILLING TO PAY FOR USING THE TEST.
I understand the decision tree on its DO THE TEST line (which is $27. 10). But how did they come to $25 for DONT DO THE TEST?
If they don’t do the test, then 25% will be defective which means they will have earned $40 contribution buy then had to pay out $60, and 75% not defective which means earning $40.
So the expected return is (75% x 40) + (25% x (40 – 60)) = 30 – 5 = 25
Sir, is Kaplan’s kit for geniuses? I wouldn’t have got that without your help. Thank you very much, Sir.
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