IE 426: Stochastic Models of Industrial Systems

Winter 2020
Homework 5
Due Date: January 27, 2020 in the class

Required problems to be turned in:

1. To absorb some short-term excess production capacity at its Arizona plant, Special
Instrument Products is considering a short manufacturing run for either of two new
products, a temperature sensor or a pressure sensor. The market for each product is
known if the products can be successfully developed. However, there is some chance that
it will not be possible to successfully develop them. Revenue of $1,000,000 would be
realized from selling the temperature sensor and revenue of $400,000 would be realized
from selling the pressure sensor. Both of these amounts are net of production cost but do
not include development cost. If development is unsuccessful for a product, then there
will be no sales, and the development cost will be totally lost. Development cost would
be $100,000 for the temperature sensor and $15,000 for the pressure sensor. For Temp
sensor there is 0.55 of chance to be successful (0.45 failure). For Pressure Sensor the
probability of success is 0.80 success and 0.20 failure. Which, if either, of these products
should Special Instrument Products attempt to develop? (Show your decision tree)

2. Quality Assurance Inspection Sampling: Consider the manufacturing process of

commodity computer memory chips. In order to control outgoing quality we need to
design a sampling inspection plan. From historical information it is evident that shipped
lots of 1,000 are either 1% or 10% nonconforming. It is also known that 90% of the lots
are 1% nonconforming and the other 10% are 10% nonconforming. Sampling And testing
costs $2.50 Per sample.

States of Nature
θ1: 1% nonconforming, P(θ1) = .9 (Good lot)
θ2: 10% nonconforming, P(θ2) = .1 (Bad lot)

Decision alternatives
a1 : accept lot
a2 : reject lot

Costs
a1|θ1= 100
a1|θ2 = 1000
a2|θ1 = 400
a2|θ2 = 400
 a. Determine the optimal sampling plan given the information above where samples are
taken simultaneously. The sampling plan will state the number (n) to sample and the
strategy of whether to choose a1 or a2 based on the results of the sample(s).

b. Determine EVPI, EVSI and Efficiency for the sampling plan.

c. Repeat parts a-­‐b assuming that sampling may be done sequentially (i.e., one-at-a-time,
after first sample you may choose to accept, reject, or take the next sample, etc.)

Optional problems

1. Vincent Cuomo is the credit manager for the Fine Fabrics Mill. He is currently faced with
the question of whether to extend $100,000 credit to a potential new customer, a dress
manufacturer. Vincent has three categories for the credit-worthiness of a company: poor
risk, average risk, and good risk, but he does not know which category fits this potential
customer. Experience indicates that 20 percent of companies similar to this dress
manufacturer are poor risks, 50 percent are average risks, and 30 percent are good risks.
If credit is extended, the expected profit for poor risks is -$15,000, for average risks
$10,000, and for good risks $20,000. If credit is not extended, the dress manufacturer will
turn to another mill. Vincent is able to consult a credit-rating organization for a fee of
$5,000 per company evaluated. For companies whose actual credit record with the mill
turns out to fall into each of the three categories, the following table shows the
percentages that were given each of the three possible credit evaluations by the credit
rating organization.

a. Assuming the credit-rating organization is not used, develop the decision tree for this case
and determine which alternative should be chosen.

b. Find the EVSI value for this problem. Does this answer indicate that consideration should
be given to using the credit-rating organization? Find the posterior probabilities of the
respective states of nature for each of the three possible credit evaluations of this
potential customer. (Provide the calculations in Bayes tabular form.)