KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1

CONTENTS PAGE
Page INTRODUCTION PROBLEM STATEMENT THEORY SOLUTION DISCUSSION CONCLUSION REFERENCES APPENDIX 28 27 28 11 25 2 4 6

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INTRODUCTION
1.0 INTRODUCTION TO DECISION MAKING Decision making is the process of selecting a course of action from several alternatives based on the desired objective. It begins from the process of identification and ends with implementation. 1.1 Problem Identification

When faced with an issue where a decision has to be made, we should first attempt to recognise the problem and the available choices. Not only is this identification significant to the final decision, it is essential to make sure proper procedures are followed so as to not stray from the original objective. 1.2 Gathering Information

Information here is that with relevance to the objective at hand. We should list out important criteria that will determine the outcome or selection and decide how to evaluate based on those selected. 1.3 1.4 Analyzing and Developing Options Evaluating Alternatives

We evaluate based on the selected options by determining the criteria with more significance and focusing on options that serve those better. 1.5 Selection

Through assessing its feasibility, acceptability and desirability, the best suited alternative or choice is selected. This selection is further evaluated for risks and problems that might arise from choosing it. 1.6 Acting on it

This is the final step of any decision making process; implementation of the decision or chosen action.

2.0 DECISION ANALYSIS IN COMPANIES More commonly recognised as an essential leadership skill, the relevance and necessity of professional decision making in the modern working environment covers far more than just that as it JKAS 5 Page 2

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 is increasingly being recognised as a science. Decision analysis is the disciple comprising philosophy, theory, methodology and professional practice when addressing decisions and decision making in a formal manner. A common representation of where decision analysis is used is through influence diagrams and tree diagrams. These examples are used in different forms of representations and stand for the probabilities of certainties or uncertainties in a decision making criterion. For example, when we wish to show the probability of an outcome happening, we use a tree diagram, complete with its probability for easy understanding. The majority, if not most, multi-million dollar companies are able to rake in big revenues because they incorporate the use of decision analysis in making major decisions. The basis behind decision analysis is to ensure that the outcome of any decision making is reviewed for risks before being implemented to ensure that the best possible decision for an objective is selected. 3.0 SIGNIFICANCE OF MARKET RESEARCH Market research is the organized effort to obtain information on the market and customers. Companies or organisations carry out this research to find out what people want or need, how much theyre willing to pay and other such details which can help them formulate a plan or design products catering to those needs. Understanding the market demand is essential to making sure that we cater within the need and not mass produce unnecessarily or worse, produce a product without any demand. It is a key factor to gain an upper hand over competitors through collecting important information to identify and analyze the market need, market size and competition. With the information obtained, organisations can suggest better alternatives and predict efficiently the outcome of a problem, hence decide better.

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PROBLEM STATEMENT
The Gorman Manufacturing Company is deciding between manufacturing the component part for its product at its Milan, Michigan plant or else purchase the component part from a supplier. In this case, we take that the resulting profit possible to be based upon the product demand. In order to make that decision, we will refer to the formulated payoff table shown below which gives us the projected profit (000 $) if the decision alternative is selected.

State of Nature
Low demand Medium demand High demand

Decision Alternative
Manufacture, d1 Purchase, d2

s1 -20 10

s2 40 45

s3 100 70

Also given are the state-of-nature probabilities: P(s1) = 0.35, P(s2) = 0.35 and P(s3) = 0.30 . The problem is analysed thoroughly to determine how best to decide based on the available alternatives: 1. The first step is to recommend a decision by using a decision tree. Decision trees are tree-like models representing all possible outcomes of a decision and its probability of occurrence.

2. Expected Value of Perfect Information also known as EVPI in short is the price that one should be willing to pay in order to gain access to perfect information. Perfect information here is further defined by the information to determine the all the possible outcomes at the end which could help them decide on the best solution. Using EVPI will enable the Gorman Manufacturing Company to determine if or not it is advisable and simply worth it to pay for a more accurate estimate of the product demand.

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 3. We would expect a favourable (F) or unfavourable (U) condition with a test market study of the potential demand. These conditional probabilities were determined as follows: P(F|s1) = 0.10 P(F|s2) = 0.40 P(F|S3) = 0.60 P(U|s1) = 0.90 P(U|s2) = 0.60 P(U|s3) = 0.40

The pre-determined conditional probabilities for favourable and unfavourable outcomes, the company will be able to determine if or not the market research report will be favourable.

4. It is important for the Gorman Manufacturing Company to strategize their decision to make the best decision possible. An optimal decision is one where no other possible decision options could lead to a better outcome than that itself. It is the best choice which maximises the expected utility.

5. Market research is a very vital component of business strategy. Through this, the company is able to determine the expected value of the decision alternative.

6. Finally, we determine the efficiency of the information obtained.

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THEORY
1.0 Introduction to Bayes Theorem Bayes' Theorem is a theorem of probability theory originally stated by the Reverend Thomas Bayes. It can be seen as a way of understanding how the probability that a theory is true is affected by a new piece of evidence. Bayes Theorem is the key to almost any procedure for extracting information from data. Bayes Theorem lets us work backward from measured results to deduce what might have caused them. 2.0 Definitions of probability terms A prior probability is an initial probability value originally obtained before any additional information is obtained. A posterior probability is a probability value that has been revised by using additional information that is later obtained. 3.0 The Theorem The concept of conditional probability is introduced in Statistics. We noted that the conditional probability of an event is a probability obtained with the additional information that some other event has already occurred. The probability of event A, given that event B has subsequently occurred, is ( | ) ( ( ) )

The conditional probability of A given B can be found by assuming that event B has occurred and, working under that assumption, calculating the probability that event A will occur. By definition of conditional probabilities: ( ) ( | ) ( )

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 ( | ) ( ) Thus the Bayes theorem ( | ) ( | ) ( ) ( ) ( | ) ( ) ( ) ( | ) ( ) ( )

( | )

( )

4.0 Introduction to Decision Trees A decision tree is a method you can use to help make good choices, especially decisions that involve high costs and risks. Decision trees use a graphic approach to compare competing alternatives and assign values to those alternatives by combining uncertainties, costs, and payoffs into specific numerical values. If you are a project manager, business analyst, or a project decision-maker, this primer is for you. If you are interested in cognitive science, artificial intelligence, data mining, medical diagnosis, formal problem solving, or game theory.

4.1 Advantages of using decision trees Decision trees offer advantages over other methods of analyzing alternatives. They are: 1. Graphic. You can represent decision alternatives, possible outcomes, and chance events schematically. The visual approach is particularly helpful in comprehending sequential decisions and outcome dependencies. 2. Efficient. You can quickly express complex alternatives clearly. You can easily modify a decision tree as new information becomes available. Set up a decision tree to compare how changing input values affect various decision alternatives. Standard decision tree notation is easy to adopt. 3. Revealing. You can compare competing alternativeseven without complete information in terms of risk and probable value. The Expected Value (EV) term combines relative investment costs, anticipated payoffs, and uncertainties into a single numerical value. The EV reveals the overall merits of competing alternatives. JKAS 5 Page 7

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 4. Complementary. You can use decision trees in conjunction with other project management tools.

5.0 Decision Scenario Decision Scenario explains the situation for the question. First we need to understand the question and then list out all the information given and determine the factors that the scenarios will build around. 5.1 The first decision Start by drawing a small square on the left side. This is called the root node, or root. The root node represents the first set of decision alternatives. For each decision alternative draw a line, or branch, extending to the right from the root node. Allow a generous amount of space between the lines to add information. Some branches may split into additional decision alternatives or outcomes. You can also bend branches so that the lines line up horizontally. These techniques make keeping track of alternatives easier. 5.2 Chance outcomes In vary of scenarios; each factor development effort can have many outcomes. Draw a small circle, or chance node to represent any chance or choices. From each chance node draw branches towards the right; each branch represents the outcome of your choice. Label the branches accordingly. 5.3Endpoints and payoffs You can now complete all the branches with endpoints, if there is no further branch information to represent. Draw a small triangle at the end of each branch to represent the endpoint. Write the payoff value at the endpoint. In business applications the payoff is usually a monetary value equal to the anticipated net profit, or return on investment. Net profit (or net loss) is the difference between the investment cost and the total revenue. A positive value indicates a net profit, while a negative value indicates a net loss. In other words, if revenue exceeds investment, then the effort is profitable. Otherwise the effort is a net loss or a breakeven result if the payoff is zero. 5.4 Incorporate uncertainty (outcome probability)

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 You can now incorporate the relative outcome probability, or uncertainty, associated with each chance event. You can express probabilities as percentages or as decimal fractions. This primer adopts the common decision tree convention of using decimal fractions from (0.0) to (1.0), in which (1.0) = 100%. 5.6 Find the expected value (EV) You are now ready to evaluate the relative merits of each decision alternative. Expected value (EV) is the way to combine payoffs and probabilities for each node. The higher the EV is, the better a particular decision alternative on average when compared to the other alternatives in the decision tree. You calculate the EV for any chance node by summing together all the EVs for each branch that is connected to the node. The general formula for calculating EV at any chance nodes is given as: ( ) ( )

5.7 Expected Value of Perfect Information Expected Value of Perfect Information (EVPI) is the difference between the expected value with (additional) perfect information and the expected value with current information. The expected value of perfect information is the maximum amount a decision maker should pay for additional information that gives a perfect signal as to the state of nature.

Whereas,

Replacing it with short form for easily to see,

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6.0 Risk Analysis Risk analysis is the systematic study of uncertainties and risks we encounter in business, engineering, public policy, and many other areas. Risk analysts seek to identify the risks faced by an institution or business unit, understand how and when they arise, and estimate the impact (financial or otherwise) of adverse outcomes. Quantitative risk analysis is the practice of creating a mathematical model of a project or process that explicitly includes uncertain parameters that we cannot control, and also decision variables or parameters that we can control. A quantitative risk model calculates the impact of the uncertain parameters and the decisions we make on outcomes that we care about -- such as profit and loss, investment returns, environmental consequences, and the like. Such a model can help business decision makers and public policy makers understand the impact of uncertainty and the consequences of different decisions. 8.0 Expected Value of Sample Information When we need to know what the maximum price we should pay for the information should be. Or it could ask what the information is worth, computing the EVSI, we can compare it to the cost of the test to determine the desirability to test. This is also called a pre-posterior analysis as we are determining the value of additional information before us pay for it.

Replacing it with short form for easily to see,

9.0 Efficiency of Sample Information The ratio of the EVSI to the EVPI times 100 will also give you a measure of efficiency of the proposed test, expressed as a percentage. Should we stop looking for more information about the states of nature?

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 If the efficiency is high there is not much to gain. But if the efficiency is low you may not be able to do more because you have spent all you can hope to gain.

SOLUTION
PART (A) USE A DECISION TREE TO RECOMMEND A DECISION.

Explanation For the square with the number 1, we called it as a root node, representing the starting for this decision tree. The two branches are representing two decision alternatives, that are manufacturing, and purchase, . Each branch directs to one circle with the specified number. For example, the is directs to circle with the number of 2. There are three

branch representing manufacturing,

branches are draw starting from the each circle, representing the state of nature. We contains three JKAS 5 Page 11

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 state of nature, there are low demand, , medium demand, , and high demand, . Now, all the

branches are completed with endpoints. The payoff values are shown at the endpoints.

CALCULATE EXPECTED VALUE (EV)

Explanation We are using the formula to calculate the Expected Value (EV) for each decision alternatives. The general formula is ( For the Manufacturing, ( For the Purchase, ( )( ) ( )( ) ( )( ) is higher than expected )( ) ( )( ) ( )( ) ) ( )

From the expected value, we know that expected value for Purchase, value of Manufacturing, Manufacturing, , this means that Purchase,

will bring more profit pay off than

. Without any extra information, Gorman Manufacturing Company should expect

to get the most profit pay off by purchase the component part from a supplier.

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 PART (B) USE EVPI
ESTIMATE OF DEMAND. TO DETERMINE WHETHER

GORMAN

SHOULD ATTEMPT TO OBTAIN A BETTER

The first part, we discuss about without getting any extra information, we will get the highest pay off around $40.25 thousand. How about if we got perfect information? How much will be the perfect information worth? Now, lets us see for it.

)(

)(

)(

Explanation We are using the formula to calculate the Expected Value of Perfect Information (EVPI). The general formula is

Whereas,

Replacing it with short form for easily to see,

To compute the expected value with perfect information, we return to the original probabilities for the states of nature, there are ( ) example, lets discuss for the ( ) ( ) ( ) Thus, for each probability,

we need to compare the profits and we choose the decision those provide the optimal profits. As an , the optimal profit for is $10 thousands profits which and also Page 13 . Similarly, same goes to the ( )

comes from the decision alternative Purchase, JKAS 5

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 the ( ) ( ) . To avoid long speech, we direct list out the values, $45 thousand is the optimal while S100 thousand is the optimal profits for ( ) .

profits for

From the EVPI, we know that if we got the perfect information, we will get 49.25 thousand in dollars. We need to use that value to deduct the expected profit without prefect information which is 40.25 thousand in dollars. This means that Gorman Manufacturing Company will earn extra $9 thousands if the company knowing the demand.

If anybody offers to do the report for Gorman Manufacturing Company, they Should not accept the offer if the report costs more than $9000 because Gorman will experience a loss. Should not accept the offer if the report costs $9000 because there is neither gain nor loss. Should accept the offer if the report costs less than $9000 because Gorman will gain a profit.

As a conclusion, Gorman Manufacturing Company should attempt to obtain a better estimate of demand if there offered a report less than $9000.

PART (C) WHAT IS THE PROBABILITY THAT THE MARKET RESEARCH WILL BE FAVOURABLE? Probability that the market research report will be favorable, ( ) ( )( ( | ) ) ( ( ) )( ) ( | ) ( ( ) )( ) ( | ) ( )

Explanation We are using Total Probability Theorem to compute this answer. Now, we will discuss about it. Let be disjoint events that form a partition of the sample space and assume that ( ) ,

for all . Then, for any event B, we have ( ) ( ( ) ( | ) ) ( ( ) ( | ) )

-Note that each possible outcome of the experiment (sample space) is included in one and only one of the event JKAS 5 . Page 14

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 PART (D) WHAT IS GORMANS OPTIMAL DECISION STRATEGY? For Gorman to obtain the optimal decision strategy, we need to find out the expected value for each case. First, we need to construct the table to find out the posterior table for the favourable condition and also the unfavourable condition.

Favourable State of Nature Prior Probability ( ) 0.35 0.35 0.30 ( ) Conditional Probability ( | ) 0.10 0.40 0.60 Joint Probability ( | ) ( ) 0.035 0.140 0.180 ( ) Posterior Probability ( | ) 0.099 0.394 0.507 ( | )

Table 1 Branch probabilities for the Gorman Manufacturing Company decision based on a favourable market research report

Unfavourable State of Nature Prior Probability ( ) 0.35 0.35 0.30 ( ) Conditional Probability ( | ) 0.90 0.60 0.40 Joint Probability ( | ) ( ) 0.0315 0.210 0.120 ( ) Posterior Probability ( | ) 0.488 0.326 0.186 ( | )

Table 2 Branch probabilities for the Gorman Manufacturing Company decision based on an unfavourable market research report

From the table, we find that, ( | ) ( | ) JKAS 5 ( | ) ( | ) Page 15

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 ( | ) ( | )

Explanation We are using Bayers Theorem to calculate for the posterior probability which is a probability value that has been revised by using additional information that is later obtained. First, we should clear about that the probability we need to obtain is the probability of each state of nature for each decision alternative given that the favourable condition or unfavourable condition. But we are only provided with the information of the probability for the favourable condition or unfavourable condition given that each state of nature for each decision alternative. So, we need to know ( | ) instead of ( | ) or ( | ). With the Bayers Theorem, ( | ) ( | ) ( ) ( ) ( | ) ( ) ( ) ( | ) ( | ) or

( | )

( )

Now, we take state of nature

for the favourable condition as an example for the calculation. ( | ) ( ( | ) ( ) ( ) )( )

Whereas, ( ) is calculate using Total Probability Theorem which have discussed at previous part. ( ) JKAS 5 ( | ) ( ) ( | ) ( ) ( | ) ( ) Page 16

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 ( )( ) ( )( ) ( )( )

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 Explanation Same as the below decision tree, but this time we get more branches. For the starting point, we are using a square with the number of 1. Two branches from the square are grow to a square representing no market research and circle representing market research. For the no market research part is exactly like the tree diagram before that, we will now focus on explaining the market research part. Two branches from that circle represent the probabilities of favourable condition and unfavourable condition. For each of the condition, the branch is draw to a square with specified number; we are coming to the decision alternative branches again. Same goes to later steps, two branches are representing two decision alternatives, that are manufacturing, and purchase, . Each branch directs to one circle with the specified number. For in favourable condition is directs to circle with

example, the branch representing manufacturing, the number of 6.

There are three branches are draw starting from the each circle, representing the state of nature. But this time, the probabilities are the probability of each state of nature for each decision alternative given that the favourable condition or unfavourable condition. We contains three state of nature, there are low demand, , medium demand, , and high demand, . Now, all the branches are

completed with endpoints. The payoff values are shown at the endpoints. CALCULATE EXPECTED VALUE (EV) The decision tree is done, and we need to use it calculate for our expected values. We are using the same formula as above to calculate the Expected Value (EV) for each decision alternatives. The general formula is ( ) ( )

For the Manufacturing,

in favourable condition ( )( ) ( )( ) ( )( )

For the Purchase,

in favourable condition ( )( ) ( )( ) ( )( )

We are just showing favourable condition as sample calculations. Unfavourable condition parts are calculated using same method.

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 Due to different condition, we will have different optimal strategy. From the expected value, we know that expected value for Manufacturing, is higher than expected value of Purchase, in

favourable market research. This means that Manufacturing Purchase,

will bring less profit pay off than

when Gorman Manufacturing Company gets a favourable market research. But the

condition will be different when Gorman Manufacturing Company gets an unfavourable market research. From the expected value, we know that expected value for Purchase, expected value of Manufacturing, Purchase, is higher than

in unfavourable market research condition, this means that . Without any extra information,

will bring more profit pay off than Manufacturing,

Gorman Manufacturing Company should expect to get the most profit pay off by purchase the component part from a supplier. Without any extra information, Gorman Manufacturing Company should expect to get the most profit pay off by purchase the component part from a supplier as expected value for Purchase, higher than expected value of Manufacturing, is

in no market research situation. Tree diagrams are

provided at the later part to make the explanation more understandable. We simplifies the decision tree to show the best expected value for every condition.

Figure 3.5

Gorman decision tree after choosing best decisions at nodes 3,4 and 5

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 But now, we need to compare about the expected value of market research or without market research. Why to do so? This is because we need to choose the optimal strategy between whether we need to do a market research or not. So, we need to compare the expected value of both of this. The tree diagram provides to make information more clearly.

For the Market Research ( )( ) ( )( )

For the Without Market Research

From the above, we can see that, if we do a market research, we will get the highest profit pay off. Therefore, Gorman Manufacturing Company should do the market research in order to get the highest profits. This will be the optimal strategy for Gorman Manufacturing Company if without any other extra information. Now, we will do a summary for easy to understand. From these values, Gormans optimal decision strategy is to conduct the market research study and then carry out the following decision strategies: If the report is favorable, then Gorman should manufacture the component part at its Milan, Michigan, plant. If the report is unfavorable, then Gorman should purchase the component part from a supplier. JKAS 5 Page 22

KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1

These decisions can be seen clearly in the following decision tree that shows only branches associated with optimal decision strategy.

PART (E) WHAT IS THE EXPECTED VALUE OF THE MARKET RESEARCH INFORMATION? The before part, we discuss about the market research will be the optimal strategy for Gorman Manufacturing Company; we will get the highest pay off around $43.90 thousand. How much will be the market research worth? Is it we going to pay for the market research? Now, lets us see for it. From the value calculated before, the expected value associated with the market research study (EVwSI) is $43.90 thousands while the best expected value if the market research study is not undertaken (EVwoSI) is $40.250 thousands.

Explanation When we need to know what the maximum price we should pay for the information should be. Or it could ask what the information is worth, computing the EVSI, we can compare it to the cost of the test to determine the desirability to test. This is also called a pre-posterior analysis as we are determining the value of additional information before us pay for it.

Replacing it with short form for easily to see,

From the information above, we know that the market research is worth for $3.65 thousand.

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 If anybody offers to do the market research for Gorman Manufacturing Company, they Should not accept the offer if the market research costs more than $3.65 thousand because Gorman will experience a loss. Should not accept the offer if the market research costs $3.65 thousand because there is neither gain nor loss. Should accept the offer if the market research costs less than $3.65 thousand because Gorman will gain a profit. As a conclusion, Gorman Manufacturing Company should attempt to obtain a better estimate of demand if there offered a market research less than $3.65 thousand.

PART (F) WHAT IS THE EFFICIENCY OF THE INFORMATION?

Explanation The ratio of the EVSI to the EVPI times 100 will also give you a measure of efficiency of the proposed test, expressed as a percentage.

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 RISK PROFILE

Risk Model of Manufacturing

0.4 0.35 0.3 Probability 0.25 0.2 0.15 0.1 0.05 0 -40 -20 0 20 40 60 80 100 120 Profit (Thousands) S1 S2 S3

Risk Model of Purchase

0.4 0.35 0.3 Probability 0.25 0.2 0.15 0.1 0.05 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 Profit (Thousands) S1 S2 S3

Risk Profiles are provided for extra information.

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DISCUSSION
EXPECTED VALUE OF PERFECT INFORMATION (EVPI) is the difference between the expected value with (additional) perfect information and the expected value with current information. The expected value of perfect information is the maximum amount a decision maker should pay for additional information that gives a perfect signal as to the state of nature. This is an useful concept for evaluating potential information-gathering activities and comparing importance of multiple uncertainties. Several computational methods 1. Flipping tree, moving an event set of branches, appropriate for any decision tree 2. Payoff table, most appropriate only for single-stage tree (one set of uncertain outcomes with no subsequent decisions) 3. Expected improvement All three methods start by determining Expected Value under Uncertainty, EVUU, In decision theory, the expected value of perfect information (EVPI) is the price that one would be willing to pay in order to gain access to perfect information. The problem is modeled with a payoff matrix Rij in which the row index i describes a choice that must be made by the payer, while the column index j describes a random variable that the payer does not yet have knowledge of, that has probability pj of being in state j. If the payer is to choose i without knowing the value of j, the best choice is the one that maximizes the expected monetary value:

where

is the expected payoff for action i i.e. the expectation value, and

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is choosing the maximum of these expectations for all available actions. On the other hand, with perfect knowledge of j, the player may choose a value of i that optimizes the expectation for that specific j. Therefore, the expected value given perfect information is

where pj is the probability that the system is in state j, and Rij is the pay-off if one follows action i while the system is in state j. Here (miax Rij) indicates the best choice of action i for each state j. The expected value of perfect information is the difference between these two quantities,

This difference describes, in expectation, how much larger a value the player can hope to obtain by knowing j and picking the best i for that j, as compared to picking a value of i before j is known. Note: EV|PI is necessarily greater than or equal to EMV. That is, EVPI is always non-negative. EVPI provides a criterion by which to judge ordinary mortal forecasters. EVPI can be used to reject costly proposals: if one is offered knowledge for a price larger than EVPI, it would be better to refuse the offer. However, it is less helpful when deciding whether to accept a forecasting offer, because one needs to know the quality of the information one is acquiring.

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CONCLUSION
From the task, we choose to purchase the component part from a supplier that will gain a profit 40.25 (thousand dollar) instead to choose a manufacturing a component part that only gain a profit of 37.0 (thousand dollars), provided the cost of market research is less than 3.65 (thousand dollars). By using Expected Value of Perfected Information (EVPI), we find that the value of profit will increase to 49.25 (thousand dollars), and we could get more 9.0 (thousand dollars) when applying the EVPI. Thus the Gorman Manufacturing Company should attempt to obtain a better estimate of demand. From the calculation by using the test market study the potential demand, the probability that the market research report would be favourable is 0.355. From the decision tree, Gormans optimal decision strategy when using the test market study and in favourable condition are manufacture and given favourable is 64.48 (thousand dollars), when the decision is purchase and given favourable is 54.21 (thousand dollars). For the Gormans optimal strategy when using the test market study and in unfavourable condition are manufactures and given unfavourable is 21.88 (thousand dollars), when the decision is purchase and given unfavourable is 32.57 (thousand dollars). By referring to the decision tree that was calculated, we found that the Expected Value of market research information (also known as Expected Value of Sample Information (EVSI) ) can be found by summation of the total profit for test market either using a favourable (F) or Unfavourable (U) minus the profit gain if not using the test market. Thus, from the Gormans optimal strategy we have select for the favourable is 64.48 (thousand dollars) and for the unfavourable is 32.57 (thousand dollars). Thus the Expected Value of Sample Information found is 3.65 (thousand dollars). The efficiency of the information would be found by find the percentage of the ratio of Expected Value of Sample Information (EVSI) over the value of Expected Value of Perfected Information (EVPI). Thus, the efficiency of the information was 40.56%

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REFERENCES
1. Felli, James C. and Hazen, Gordon B. (March 1998). Do Sensitivity Analyses Really Capture Problem Sensitivity? An Empirical Analysis Based on Information Value. Retrieved from http://www.treeplan.com/chapters/19_decan_20071029_1042.pdf

2. Griffin, S. and Claxton, K. Interpreting the Expected Value of Perfect Information About Parameters. Retrieved from http://www.york.ac.uk/media/che/documents/papers/presentations/seqposterSMDMfina.pdf

APPENDIX
MEETING MINUTES FOR STATISTIC PBL DISCUSSION First meeting Venue: Time: Date: Group members: FKAB Foyer 10.00-11.00 A.M. 27 March 2012 1. Tan Pei Ying 2. Diviya Shankar 3. Muhammad Ariff Putra Ansaruddin 4. Syuhaidah Hani Hussin 5. Fatin Nur Nadzirah Binti Mohd Ibrahim

No 1

Objective Each members understand the PBL task given and list of thing to be done Elect one of the group members to be the leader to led the work

Strategy/Outcome Every group member shows in collaboration

Every members agreed to choose Diviya as our group leader Diviya is very appropriate in carrying out responsibilities as a leader

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 Discuss all the thing need be done for the folio need as for the power point form Group leader list the thing need for the folio such as introduction, Problem Statement, Objective, theory, solution, Discussion and Reference The tasks was divide to each members namely Ariff, Pei Ying, Syuhaidah, Fatin and including the leader, Diviya After the discussion everyone agreed that the point that be loaded in part introduction, problem statement and theory must be different Each member would be assist other group members if they need help

Discuss the point for included to each part in the folio

MEETING MINUTES FOR STATISTIC PBL DISCUSSION Second meeting Venue: Time: Date: Group members: FKAB Foyer 12.00-1.00 P.M. 3rd April 2012 1. Tan Pei Ying 2. Diviya Shankar 3. Muhammad Ariff Putra Ansaruddin 4. Syuhaidah Hani Hussin 5. Fatin Nur Nadzirah Binti Mohd Ibrahim

No 1 2

Objective Each members present their part to others and explain the task Discuss the part should be included and excluded to be loaded in the power point form Discussion the solution of PBL applying problem The leader had present all the part and complete overall conclusion

Strategy/Outcome If anyone have a problem to complete their assignment, other members would help him/her Power point form task completed

Compare the solution of each members Discuss the hard part of problem Members help others member that not find the correct solution Get the correct applying problem solution Leader and every group members obtain the consensus to solve and finish the Problem Based Learning Assignment

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KKKQ 2024 ENGINEERING STATISTICS 2012 PROBLEM-BASED LEARNING 1 Team Policies and Expectations 1. Agreement between Members The group is expected to abide by the following regulations regardless of position he/she is elected and maintain appropriate conduct during meetings: i) Punctually attend all meetings agreed upon. a. In case of absence, cause of absence letter is to be submitted to groups recorder. ii) Try out the problem given before the discussion is held. a. There should not be any excuse for failure to attempt. b. In the case whereby the questions were too difficult, member(s) with difficulty should notify coordinator in which a pre-discussion meeting will be held to address the difficult parts. iii) Understand and complete the given problem before delegation of specific tasks is done. a. A discussion will be held to discuss all parts of the problem and clear doubts. b. If all members cannot solve one or more parts, we will discuss it with another group before bringing it up with our lecturer. c. The checker is in charge of making sure every members final working is correct (to the best of our knowledge). iv) Communicate our differences and any disagreements with each other first, before seeking outside interference. a. Any dissatisfaction should be addressed in the final meeting of a PBL discussion and before filling in of peer evaluation forms to ensure every member is aware of their contributions towards the final product. v) Delegation of work of the final report and/or presentation should be on a voluntary basis a. If a member does not volunteer to do it nor is present to volunteer his/her self, only then may others elect that member to do that part.

I have agreed to abide by the terms decided upon and listed above (Diviya Shankar) (Ariff Putra bin Ansaruddin) (Tan Pei Ying)

(Syuhaidah Hani) JKAS 5

(Fatin Nur Nadzirah) Page 31