MacDonald Products, Inc., of Clarkson, New York, has the option of (a) proceeding immediately with production of a new top-of-the-line stereo TV that has just completed prototype testing or (b) having the value analysis team complete a study. If Ed Lusk, VP for operations, proceeds with the existing prototype (option a), the firm can expect sales to be 95 comma 000 units at $610 each, with a probability of 0.76 and a 0.24 probability of 60 comma 000 at $610. If, however, he uses the value analysis team (option b), the firm expects sales of 85 comma 000 units at $720, with a probability of 0.65 and a 0.35 probability of 70 comma 000 units at $720. Value engineering, at a cost of $85 comma 000, is only used in option b. Which option has the highest expected monetary value (EMV)?

Option b has the highest expected monetary value (EMV) of $57,335,000 after accounting for Value Engineering cost of $85,000 for the option.

Explanation:

Option A's EMV = $52,826,000 calculated as follows:

(95,000 x $610 x 0.76) + (60,000 x $610 x 0.24).

Option A's EMV = $57,335,000 calculated as follows:

(85,000 x $720 x 0.65) + (70,000 x $720 x 0.35) - $85,000.

Expected Monetary Value, EMV, is a statistical tool that is used to quantify risks using probability to weigh the outcomes from decision choices.

Using EMV, the expected value is calculated by multiplying the outcomes with their percentage chances of happening.  This gives a weighted outcome that can be used to compare options.

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