To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Decision

To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Decision MakingDecision Making

Supplement ASupplement A


Break-Even AnalysisBreak-Even Analysis



Patients (Patients (QQ))

Do

llars

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400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –|| || || ||

500500 10001000 15001500 20002000Example A.1Example A.1



400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –


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500500 10001000 15001500 20002000Example A.1Example A.1

Quantity Total Annual Total Annual(patients) Cost ($) Revenue ($)

(Q) (100,000 + 100Q) (200Q)

0 100,000 02000 300,000 400,000



400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –

Total annual revenuesTotal annual revenues


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500500 10001000 15001500 20002000

(2000, 400)(2000, 400)

Example A.1Example A.1


(Q) (100,000 + 100Q) (200Q)

0 100,000 02000 300,000 400,000




Total annual costsTotal annual costs


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400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –|| || || ||

500500 10001000 15001500 20002000

Fixed costsFixed costs

(2000, 400)(2000, 400)

(2000, 300)(2000, 300)



(Q) (100,000 + 100Q) (200Q)

0 100,000 02000 300,000 400,000






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400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –|| || || ||

500500 10001000 15001500 20002000


Break-even quantityBreak-even quantity

(2000, 400)(2000, 400)

(2000, 300)(2000, 300)

ProfitsProfits

LossLoss



(Q) (100,000 + 100Q) (200Q)

0 100,000 02000 300,000 400,000



400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –

Figure A.1Figure A.1




Do

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500500 10001000 15001500 20002000


Break-even quantityBreak-even quantity

(2000, 400)(2000, 400)

(2000, 300)(2000, 300)

ProfitsProfits

LossLoss


Sensitivity AnalysisSensitivity Analysis

400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –




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|| || || ||

500500 10001000 15001500 20002000


ProfitsProfits

LossLoss




400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –





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500500 10001000 15001500 20002000


ProfitsProfits

LossLoss

Forecast = 1,500Forecast = 1,500



400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –




Do

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Do

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|| || || ||

500500 10001000 15001500 20002000


ProfitsProfits

LossLoss



pQ – (F + cQ)



400 –400 –

300 –300 –

200 –200 –

100 –100 –

0 –0 –




Do

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Do

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|| || || ||

500500 10001000 15001500 20002000


ProfitsProfits

LossLoss



pQ – (F + cQ)

200(1500) – [100,000 + 100(1500)]

$50,000


Make-or-Buy DecisionsMake-or-Buy Decisions






Q =Fm – Fb

cb – cm

Q =12,000 – 2,400

2.0 – 1.5





Q =Fm – Fb

cb – cm

Q = 19,200 salads


Preference MatrixPreference Matrix



PerformancePerformance WeightWeight ScoreScore Weighted ScoreWeighted ScoreCriterionCriterion ((AA)) ((BB)) ((AA x x BB))

Market potentialMarket potentialUnit profit marginUnit profit marginOperations compatibilityOperations compatibilityCompetitive advantageCompetitive advantageInvestment requirementInvestment requirementProject riskProject risk

Threshold score Threshold score = 800= 800





Market potentialMarket potential 3030Unit profit marginUnit profit margin 2020Operations compatibilityOperations compatibility 2020Competitive advantageCompetitive advantage 1515Investment requirementInvestment requirement 1010Project riskProject risk 55






Market potentialMarket potential 3030 88Unit profit marginUnit profit margin 2020 1010Operations compatibilityOperations compatibility 2020 66Competitive advantageCompetitive advantage 1515 1010Investment requirementInvestment requirement 1010 22Project riskProject risk 55 44






Market potentialMarket potential 3030 88 240240Unit profit marginUnit profit margin 2020 1010 200200Operations compatibilityOperations compatibility 2020 66 120120Competitive advantageCompetitive advantage 1515 1010 150150Investment requirementInvestment requirement 1010 22 2020Project riskProject risk 55 44 2020







Weighted score =Weighted score = 750750










< 800< 800








Not At This Time

Not At This Time



Figure A.3


Under CertaintyUnder Certainty



AlternativeAlternative LowLow HighHigh

Small facilitySmall facility 200200 270270Large facilityLarge facility 160160 800800Do nothingDo nothing 00 00

PossiblePossibleFuture DemandFuture Demand








If future demand will be low If future demand will be low ––







If future demand will be low If future demand will be low – – Choose the small facility.Choose the small facility.







If future demand will be low If future demand will be low – – Choose the small facility.Choose the small facility.


Under UncertaintyUnder Uncertainty










Maximin Maximin ––







Maximin Maximin ––

Best of the worstBest of the worst







Maximin Maximin –– Small Small

Best of the worstBest of the worst







Maximin Maximin – – SmallSmallMaximax Maximax ––







Maximin Maximin –– Small SmallMaximax Maximax ––

Best of the bestBest of the best







Maximin Maximin –– Small SmallMaximax Maximax –– Large Large

Best of the bestBest of the best







Maximin Maximin –– Small SmallMaximax Maximax –– Large LargeLaplace Laplace ––








Best Best weighted weighted payoffpayoff

Small facilitySmall facility 0.5(200) + 0.5(270) = 2350.5(200) + 0.5(270) = 235









Small facilitySmall facility 0.5(200) + 0.5(270) = 2350.5(200) + 0.5(270) = 235Large facilityLarge facility 0.5(160) + 0.5(800) = 4800.5(160) + 0.5(800) = 480







Maximin Maximin –– Small SmallMaximax Maximax –– Large LargeLaplace Laplace –– Large Large









Maximin Maximin –– Small SmallMaximax Maximax –– Large LargeLaplace Laplace –– Large LargeMinimax Regret Minimax Regret ––









Best Best worst worst regretregret

RegretRegretLow DemandLow Demand High DemandHigh Demand

Small facilitySmall facility 200 – 200 = 0200 – 200 = 0 800 – 270 = 530800 – 270 = 530










Small facilitySmall facility 200 – 200 = 0200 – 200 = 0 800 – 270 = 530800 – 270 = 530Large facilityLarge facility 200 – 160 = 40200 – 160 = 40 800 – 800 = 0800 – 800 = 0







Maximin Maximin –– Small SmallMaximax Maximax –– Large LargeLaplace Laplace –– Large LargeMinimax Regret Minimax Regret –– Large Large



Small facilitySmall facility 200 – 200 = 0200 – 200 = 0 800 – 270 = 530800 – 270 = 530Large facilityLarge facility 200 – 160 = 40200 – 160 = 40 800 – 800 = 0800 – 800 = 0






Maximin Maximin –– Small SmallMaximax Maximax –– Large LargeLaplace Laplace –– Large LargeMinimax Regret Minimax Regret –– Large Large



Under RiskUnder Risk




PPsmallsmall = 0.4 = 0.4

PPlargelarge = 0.6 = 0.6










AlternativeAlternative Expected ValueExpected Value

Small facilitySmall facility 0.4(200) + 0.6(270) = 2420.4(200) + 0.6(270) = 242













Highest Highest Expected Expected ValueValue










Under RiskUnder RiskFigure A.4


Perfect InformationPerfect Information















EventEvent Best PayoffBest Payoff

Low demandLow demand 200200High demandHigh demand 800800




Low demandLow demand 200200 EVEVperfectperfect = 200(0.4) + 800(0.6) = 560 = 200(0.4) + 800(0.6) = 560

High demandHigh demand 800800

















High demandHigh demand 800800 EVEVimperfectimperfect = 160(0.4) + 800(0.6) = 544 = 160(0.4) + 800(0.6) = 544












Value of perfect information = $560,000 - $544,000Value of perfect information = $560,000 - $544,000












Value of perfect information = $16,000Value of perfect information = $16,000


Decision TreesDecision Trees



= Event node= Event node

= Decision node= Decision node

EEii = Event = Event ii

PP((EEii) = Probability of event ) = Probability of event ii

1st1stdecisiondecision

PossiblePossible2nd decision2nd decision

Payoff 1Payoff 1

Payoff 2Payoff 2

Payoff 3Payoff 3

Alternative 3Alternative 3



Payoff 1Payoff 1

Payoff 2Payoff 2

Payoff 3Payoff 3

EE11 [ [PP((EE11)])]

EE22 [ [PP((EE22)])]

EE33 [ [PP((EE33)])]

EE22 [ [PP((EE22)])]

EE33 [ [PP((EE33)])]

EE 11 [ [PP

((EE 11)])]

Altern

ativ

e 1

Altern

ativ

e 1

Alternative 2

Alternative 2

Payoff 1Payoff 1

Payoff 2Payoff 2

1 2






Smal

l fac

ility

Smal

l fac

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Large facility

Large facility

1




Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

Low demand [0.4]Low demand [0.4]

Don’t expandDon’t expand

ExpandExpand

$200$200

$223$223

$270$270

High demand

High demand

[0.6][0.6]

1

2




Low dem

and

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand

Do nothingDo nothing

AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800

Modest response [0.3]Modest response [0.3]

Sizable response [0.7]Sizable response [0.7]

$20$20

$220$220

High demand

High demand

[0.6][0.6]

High demand [0.6]High demand [0.6]

1

2

3




Low dem

and

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3




Low dem

and

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3

0.3(20) + 0.7(220))




$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3

0.3(20) + 0.7(220)




$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3

$270$270




($160)($160)Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3




($160)($160)Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3

0.4(200) + 0.6(270)

0.4(160) + 0.6(800)




($160)($160)Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

$242$242

$544$544



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3


0.4(200) + 0.6(270)

0.4(160) + 0.6(800)



$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

$544$544

$242$242

$544$544



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3




$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

$544$544

$242$242

$544$544



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


1

2

3



Solved Problem 1Solved Problem 1

250 –250 –

200 –200 –

150 –150 –

100 –100 –

50 –50 –

0 –0 –


Total revenuesTotal revenues

Total costsTotal costs

Units (in thousands)Units (in thousands)

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|| || || || || || || ||

11 22 33 44 55 66 77 88

Break-evenBreak-evenquantityquantity

3.13.1

$77.7$77.7


Solved Problem 4Solved Problem 4


Bad times [0.3]Bad times [0.3]

Normal times [0.5]Normal times [0.5]

Good times [0.2]Good times [0.2]

One liftOne lift

Two liftsTwo lifts

Bad times [0.3]Bad times [0.3]

Normal times [0.5]Normal times [0.5]

Good times [0.2]Good times [0.2]

$256.0$256.0

$225.3$225.3

$256.0$256.0

$191$191

$240$240

$240$240

$151$151

$245$245

$441$441

Documents

To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Decision