ABC Inc. must make a decision on its current capacity for next year. Estimated profits (in $000s) based on next year’s demand are shown in the table below.
Next Year’s Demand
Alternative Low High
Expand $100 $200
Subcontract $50 $120
Do nothing $40 $50
Using the information above, which alternative should be chosen based on the maximin criterion?
The maximin criterion is a decision-making approach that seeks to identify the alternative with the highest minimum payoff or profit. In other words, it focuses on ensuring that the worst-case scenario yields the best possible outcome. In the context of ABC Inc.’s decision on its current capacity for the next year, we have three alternatives: Expand, Subcontract, and Do Nothing. Each of these alternatives has associated estimated profits (in $000s) based on next year’s demand, with both low and high demand scenarios.
To apply the maximin criterion, we need to identify the alternative that provides the highest minimum profit for the worst-case demand scenario. Let’s analyze the data:
Expand
Low Demand: $100,000
High Demand: $200,000
Subcontract
Low Demand: $50,000
High Demand: $120,000
Do Nothing
Low Demand: $40,000
High Demand: $50,000
The maximin criterion would suggest selecting the alternative with the highest minimum profit, as it is the most risk-averse approach. In this case, the worst-case scenario is “Low Demand,” and the minimum profits for each alternative in this scenario are as follows:
Expand: $100,000
Subcontract: $50,000
Do Nothing: $40,000
Based on the maximin criterion, the “Expand” alternative should be chosen because it provides the highest minimum profit of $100,000 in the worst-case scenario (Low Demand). This choice minimizes the risk of incurring lower profits.
It’s important to note that the maximin criterion assumes a conservative and risk-averse approach, focusing on protecting against the worst possible outcome. However, it does not consider the probabilities of different demand scenarios. If ABC Inc. is willing to take on more risk and considers the likelihood of high demand, other decision criteria, such as the maximax or expected value criterion, might be more appropriate.
As a renowned provider of the best writing services, we have selected unique features which we offer to our customers as their guarantees that will make your user experience stress-free.
Unlike other companies, our money-back guarantee ensures the safety of our customers' money. For whatever reason, the customer may request a refund; our support team assesses the ground on which the refund is requested and processes it instantly. However, our customers are lucky as they have the least chances to experience this as we are always prepared to serve you with the best.
Plagiarism is the worst academic offense that is highly punishable by all educational institutions. It's for this reason that Peachy Tutors does not condone any plagiarism. We use advanced plagiarism detection software that ensures there are no chances of similarity on your papers.
Sometimes your professor may be a little bit stubborn and needs some changes made on your paper, or you might need some customization done. All at your service, we will work on your revision till you are satisfied with the quality of work. All for Free!
We take our client's confidentiality as our highest priority; thus, we never share our client's information with third parties. Our company uses the standard encryption technology to store data and only uses trusted payment gateways.
Anytime you order your paper with us, be assured of the paper quality. Our tutors are highly skilled in researching and writing quality content that is relevant to the paper instructions and presented professionally. This makes us the best in the industry as our tutors can handle any type of paper despite its complexity.
Recent Comments