Case Studies 1. SOLUTION TO STARTING RIGHT CASE, CH. 3, PAGE 110

Topics: Overtime, Maintenance, Preventive maintenance Pages: 16 (4247 words) Published: October 14, 2014
Case Studies
1. SOLUTION TO STARTING RIGHT CASE, CH. 3, PAGE 110
This is a decision-making-under-uncertainty case. There are two events: a favorable market (event 1) and an unfavorable market (event 2). There are four alternatives, which include do nothing (alternative 1), invest in corporate bonds (alternative 2), invest in preferred stock (alternative 3), and invest in common stock (alternative 4). The decision table is presented. Note that for alternative 2, the return in a good market is $30,000 (1 + 0.13)5 = $55,273. The return in a good market is $120,000, (4 x $30,000) for alternative 3, and $240,000, (8 x $30,000) for alternative 4. Payoff table

Laplace

Hurwicz

Event 1

Event
2

Average
Value

Minimu
m

Maximu
m

Value

Alternativ
e1

0

0

0.0

0

0

0.00

Alternativ
e2

55,273


10,00
0

22,636.5


10,000

55,273


2,819.9
7

Alternativ
e3

120,00
0


15,00
0

52,500.0


15,000

120,000

–150.00

Alternativ
e4

240,00
0


30,00
0

105,000.
0


30,000

240,000

–300.00

Regret table
Maximum
Alternative

Event 1

Event 2

Regret

Alternative 1

240,000

0

240,000

Alternative 2

184,727

10,000

184,727

Alternative 3

120,000

15,000

120,000

Alternative 4

0

30,000

30,000

a. Sue Pansky is a risk avoider and should use the maximin decision approach. She should do nothing and not make an investment in Starting Right. b. Ray Cahn should use a coefficient of realism of 0.11. The best decision is to do nothing.

c. Lila Battle should eliminate alternative 1 of doing nothing and apply the maximin criterion. The result is to invest in the corporate bonds. d. George Yates should use the equally likely decision criterion. The best decision for George is to invest in common stock.

e. Pete Metarko is a risk seeker. He should invest in common stock. f. Julia Day can eliminate the preferred stock alternative and still offer alternatives to risk seekers (common stock) and risk avoiders (doing nothing or investing in corporate bonds).

2. North–South Airline, Ch. 4, page 145

Northern Airline Data
Airframe Cost

Engine Cost

Average Age

Year

per Aircraft

per Aircraft

(Hours)

2001

51.80

43.49

6,512

2002

54.92

38.58

8,404

2003

69.70

51.48

11,077

2004

68.90

58.72

11,717

2005

63.72

45.47

13,275

2006

84.73

50.26

15,215

2007

78.74

79.60

18,390

Southeast Airline Data
Average Age

Airframe Cost

Engine Cost

Year

Per Aircraft

per Aircraft

(Hours)

2001

13.29

18.86

5,107

2002

25.15

31.55

8,145

2003

32.18

40.43

7,360

2004

31.78

22.10

5,773

2005

25.34

19.69

7,150

2006

32.78

32.58

9,364

2007

35.56

38.07

8,259

Utilizing QM for Windows, we can develop the following regression equations for the variables of interest.
Northern Airline—airframe maintenance cost:
Cost = 36.10 + 0.0025 (airframe age)
Coefficient of determination = 0.7694
Coefficient of correlation = 0.8771
Northern Airline—engine maintenance cost:
Cost = 20.57 + 0.0026 (airframe age)

Coefficient of determination = 0.6124
Coefficient of correlation = 0.7825
Southeast Airline—airframe maintenance cost:
Cost = 4.60 + 0.0032 (airframe age)
Coefficient of determination = 0.3904
Coefficient of correlation = 0.6248
Southeast Airline—engine maintenance cost:
Cost = −0.671 + 0.0041 (airframe age)
Coefficient of determination = 0.4599
Coefficient of correlation = 0.6782
The graphs below portray both the actual data and the regression lines for airframe and engine maintenance costs for both airlines. Note that the two graphs have been drawn to the same scale to facilitate comparisons between the two airlines.

Northern Airline: There seem to be modest correlations between maintenance costs and airframe age for...
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