Aquaguard manufactures three models of water purifiers in three separate plants at Taiwan. These plants serve the demand in Europe. All three models sell at a unit price of $100 and the holding cost is 5% of the selling price per month. The monthly demand for these models is normally distributed with the following parameters:

Model 1: Mean 1000, SD 300

Model 2: Mean 1000, SD 300

Model 3: Mean 1000, SD 300

The demand for Model 1 and Model 2 has a correlation coefficient of (-) 0.35, while that for Model 3 is independent of the other two models. The company wishes to make two of the models in one plant by using flexible technology.

Required:

a) Which two models should Aquaguard choose in order to minimize production variability in the new plant? (as measured by the coefficient of variation).

Question

Business

Juliana

21 August, 01:43

Aquaguard manufactures three models of water purifiers in three separate plants at Taiwan. These plants serve the demand in Europe. All three models sell at a unit price of $100 and the holding cost is 5% of the selling price per month. The monthly demand for these models is normally distributed with the following parameters:

Model 1: Mean 1000, SD 300

Model 2: Mean 1000, SD 300

Model 3: Mean 1000, SD 300

The demand for Model 1 and Model 2 has a correlation coefficient of (-) 0.35, while that for Model 3 is independent of the other two models. The company wishes to make two of the models in one plant by using flexible technology.

Required:

a) Which two models should Aquaguard choose in order to minimize production variability in the new plant? (as measured by the coefficient of variation).

+2

Answers (1)

Know the Answer?

Judith Leonard · Answer 1

Aquaguard may choose any of the two models to minimize the production variability in the new plant.

Explanation:

Model 1: Mean = 1000, Standard Deviation (SD) = 300

Model 2: Mean = 1000, SD = 300

Model 3: Mean = 1000, SD = 300

Coefficient of variation for model 1

C. V = (SD : Mean) * 100

= (300 : 1000) * 100

= 30 %

Coefficient of variation for model 2

= (300 : 1000) * 100

= 30 %

Coefficient of variation for model 3

= (300 : 1000) * 100

= 30 %

We conclude that all the models have same effect.