The product design group of the Flores Electrick Supplies, Inc., has verified that it needs to design the new series of switches. It should decide on one of three design strategies. The market forecasts are for 200,000 units. The better and more sophisticated the design strategy and more time spent on value engineering, the less will be variable cost. The chief of engineering design has decided that the following costs are good estimate of initial and variable costs connected with each of three strategies:
a) Low Tech: A low-tech, low cost process comprising of hiring many new junior engineers. This option has fixed cost of $45,000 and variable-cost probabilities of .3 for $.55 each, .4 for $.50 and .3 for $.45
b) Subcontract: A medium-cost approach using good outside design staff. This approach would’ve a fixed cost of $65,000 and variable-cost probabilities of .7 of $.45, .2 of $.40, and .1 of $.35.
c) High Tech: A high tech approach using extremely best of the inside staff and latest computer aided design technology. Fixed cost of $75,000 and variable cost probabilities of .9 of $.40 and .1 of $.35.
What is the best decision based on the expected monetary value (or EMV) criterion? (We want the lowest EMV as we’re dealing with cost in this problem).