AVALANCHE CORPORATION: INTEGRATING BAYESIAN ANALYSIS
INTO THE PRODUCTION DECISION-MAKING PROCESS CASE
STUDY SOLUTION
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CASE OVERVIEW
Avalanche Corporation produces a variety of ski equipment including skis, bindings, poles and
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boots. The firm needs to make production and planning decisions regarding a new product. The
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primary objective of this teaching case is to introduce the student to the rationale and mechanics
behind Bayesian analysis. The case highlights production decision-making in the context of
additional information.
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CASE OBJECTIVES
1. To appreciate the basic steps in short-term capacity planning.
2. To understand the role of expected value in capacity planning.
3. To use Bayesian analysis for updating prior probabilities.
4. To grasp the basics of decision tree analysis.
ASSIGNMENT QUESTIONS
1. Determine the break-even volume between batch flow and line flow production.
2. Determine the net incomes and expected value for each production level (15,000, 30,000 and 40,000)
using a payoff matrix.
3. Identify the optimal production level based on maximizing expected value.
4. Determine the maximum amount that Avalanche is willing to pay for perfect information.
The Case Solution Starts From page 4
,5. Calculate the updated probabilities given the initial probabilities and the consultant’s conditional
probabilities using Bayesian analysis.
6. Determine whether or not to hire the consultant based on the updated probabilities using a decision
tree.
7. Which of the case estimates are the most uncertain? Assess the impact of a change in one of these
estimates on the optimal decision (sensitivity analysis).
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ANALYSIS
1. Determine the break-even volume between batch flow and line flow production.
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The break-even volume between the two processes (batch and line) can be determined as follows:
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Fixed cost + Variable cost * Q (Process #1) = Fixed cost + Variable cost * Q (Process #2)
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Or
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Q = [Fixed Cost (#1) — Fixed Cost (#2)] / [(Variable Cost (#2) — Variable Cost (#1)]
Q = (475,000 — 900,000) / (60 — 75) = 28,333
Thus for volumes less than 28,333 the batch process is best, while for greater volumes the line
process should be used.
The Case Solution Starts From page 4
, Exhibit -1
AVALANCHE PAYOFF TABLE
Demand / 15,000 30,000 40,000 Probability
Production
35,000 1,275,000 1,300,000 1,325,000 0.6
25,000 775,000 675,000 575,000 0.4
Expected value 1,075,000 1,050,000 1,025,000
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The Case Solution Starts From page 4
INTO THE PRODUCTION DECISION-MAKING PROCESS CASE
STUDY SOLUTION
e
pl
m
Sa
CASE OVERVIEW
Avalanche Corporation produces a variety of ski equipment including skis, bindings, poles and
n
boots. The firm needs to make production and planning decisions regarding a new product. The
tio
primary objective of this teaching case is to introduce the student to the rationale and mechanics
behind Bayesian analysis. The case highlights production decision-making in the context of
additional information.
lu
So
CASE OBJECTIVES
1. To appreciate the basic steps in short-term capacity planning.
2. To understand the role of expected value in capacity planning.
3. To use Bayesian analysis for updating prior probabilities.
4. To grasp the basics of decision tree analysis.
ASSIGNMENT QUESTIONS
1. Determine the break-even volume between batch flow and line flow production.
2. Determine the net incomes and expected value for each production level (15,000, 30,000 and 40,000)
using a payoff matrix.
3. Identify the optimal production level based on maximizing expected value.
4. Determine the maximum amount that Avalanche is willing to pay for perfect information.
The Case Solution Starts From page 4
,5. Calculate the updated probabilities given the initial probabilities and the consultant’s conditional
probabilities using Bayesian analysis.
6. Determine whether or not to hire the consultant based on the updated probabilities using a decision
tree.
7. Which of the case estimates are the most uncertain? Assess the impact of a change in one of these
estimates on the optimal decision (sensitivity analysis).
e
pl
m
Sa
ANALYSIS
1. Determine the break-even volume between batch flow and line flow production.
n
The break-even volume between the two processes (batch and line) can be determined as follows:
tio
Fixed cost + Variable cost * Q (Process #1) = Fixed cost + Variable cost * Q (Process #2)
lu
Or
So
Q = [Fixed Cost (#1) — Fixed Cost (#2)] / [(Variable Cost (#2) — Variable Cost (#1)]
Q = (475,000 — 900,000) / (60 — 75) = 28,333
Thus for volumes less than 28,333 the batch process is best, while for greater volumes the line
process should be used.
The Case Solution Starts From page 4
, Exhibit -1
AVALANCHE PAYOFF TABLE
Demand / 15,000 30,000 40,000 Probability
Production
35,000 1,275,000 1,300,000 1,325,000 0.6
25,000 775,000 675,000 575,000 0.4
Expected value 1,075,000 1,050,000 1,025,000
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The Case Solution Starts From page 4
