Question

McBurger, Inc., wants to redesign its kitchens to improve productivity and quality. Three designs, called designs K1, K2, and K3, are under consideration. No matter which design is used, daily production of sandwiches at a typical McBurger restaurant is for 500 sandwiches. A sandwich costs $1.20 to produce. Non-defective sandwiches sell, on the average, for $2.50 per sandwich. Defective sandwiches cannot be sold and are scrapped.
The goal is to choose a design that maximizes the expected profit at a typical restaurant over a 300-day period. Designs K1, K2, and K3 cost $100,000, $130,000, and $150,000, respectively. Under design K1, there is a .80 chance that 90 out of each 100 sandwiches are non-defective and a .20 chance that 70 out of each 100 sandwiches are non-defective. Under design K2, there is a .85 chance that 90 out of each 100 sandwiches are non-defective and a .15 chance that 75 out of each 100 sandwiches are non-defective. Under design K3, there is a .90 chance that 95 out of each 100 sandwiches are non-defective and a .10 chance that 80 out of each 100 sandwiches are non-defective.
The expected profit level of design K1 is $____.
The expected Profit leve of design K2 is___.The expected profit level of design k3 is___.

Answer 1

Answer:

McBurger, Inc.

The expected profit level of design K1 is $_42,500__.

The expected Profit level of design K2 is_19,063__.

The expected profit level of design k3 is_20,625__.

Explanation:

a) Data and Calculations:

Daily production units at a typical McBurger restaurant = 500 sandwiches

Yearly production units =150,000 (500 * 300)

Unit production cost of a sandwich = $1.20

Selling price of non-defective sandwich = $2.50

                                              Design K1   Design K2    Design K3

Calculation of non-defective units:

0.80 * 90/100 * 150,000         108,000

0.20 * 70/100 * 150,000           21,000

0.85 * 90/100 * 150,000                              114,750

0.15 * 75/100 * 150,000                                16,875

0.90 * 95/100 * 150,000                                                 128,250

0.10 * 80/100 * 150,000                                                    12,000

                                              129,000        131,625       140,250

Sales Revenue                  $322,500    $329,063    $350,625

Production cost                   (180,000)     (180,000)     (180,000)

Cost of design                    (100,000)     (130,000)     (150,000)

Expected profit                   $42,500       $19,063      $20,625

Sales revenue = Non-defective sandwiches * $2.50

Product cost = Production units * $1.20

Expected profit = Sales Revenue - (Product cost + Design cost)