Question

Engleside Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has identified three shipping alternatives. The first is to call a common carrier, the second is to lease its own fleet of refrigerated trucks and the third option is a contractual arrangement with a local carrier. The outcome of the decision will be affected by the demand level as indicated in the payoff table below.

	Demand
Alternatives	Low	High
Common Carrier	200	4000
Lease Own Fleet	2000	2600
Contract with Local Carrier	700	3000 Engleside has no estimates of the probabilities for demand at this time but wants to do a sensitivity analysis to explore how changes in probability would affect the decision. a. Plot the EMV lines for the three alternatives on a graph (one graph), with the probability of High demand on the horizontal axis. b. Interpret your graph.

Answer 1

a) Plot of EMV lines is as follows:Formula to calculate the EMV

B7 =$A7*B$3+(1-$A7)*B$2 copy to B7:D17

b) Interpretation of graph: In the above plot of EMV lines, we see that EMV of Lease Own Fleet is the highest for probability of high demand in the range of 0 to 0.562.

For probability of high demand greater than 0.562, EMV of Common Carrier is the highest.

Therefore, as long as the probability of high demand is less than 0.562, the best shipping alternaitve is to Lease Own Fleet and for probability of high demand greater than 0.562, the best shipping alternative is to call a Common Carrier.