Yankee Industries - Make or Buy Decision

Yankee Industries must decide wether to "manufacture" a new component at its factory or "purchase" from
Research". In the absence of market research, if the demnd is high enough, it will be more profitable to manuf
than purchase it. However, make or buy decision must be made befor demand level is known. The projected pro
payoff table.

Payoff Table

State of Nature (Chance Events)

Alternatives High Demand (H) Medium Demand (M)
Manufacture 200 60
Purchase 140 80
Probabilities 0.3 0.4

Yankee Industries can decide to go for "Market Research" before making a decision for make or buy (the very fi
research is done, it will predict either a favorable market condition (F) or unfavorable market condition (U). Foll

Probability of Favorable Market Condition P (F) 0.40

Probability of Unfavorable Market Condition P (U) 0.60

Probability of High Demand Given Favorable Market Condition P (H│F) 0.45

Probability of Medium Demand Given Favorable Market Condition P (M│F) 0.40
Probability of Low Demand Given Favorable Market Condition P (L│F) 0.15

Probability of High Demand Given Unfavorable Market Condition P (H│U) 0.20

Probability of Medium Demand Given Unfavorable Market Condition P (M│U) 0.40
Probability of Low Demand Given Unfavorable Market Condition P (L│U) 0.40
 Suppose the market research is expected to cost $10,000. Determine the best decision strategy including whe
conducted.
Good Luck!!!
 Buy Decision

ory or "purchase" from a supplier with and without "Market

ore profitable to manufacture the component in-house rather
nown. The projected profits (1000's of $) are given below in the

Low Demand (L)

-30
20
0.3

make or buy (the very first choice to make). Now, if the market
arket condition (U). Following gives the relevant probabilities,
n strategy including whether the market research should be

Good Luck!!!