A distributor of computer parts purchases a specific componentfrom a supplier in lots of 1000 units. The cost of purchasing a lotis $30,000. The supplier is known to supply imperfect lots. Inother words, a lot received by the distributor may containdefective units. Historical data suggest that the proportion ofdefective units in a lot supplied by this supplier follows thefollowing probability distribution:

Proportion of defective units in a lot	Probability
0.05	0.50
0.10	0.25
0.25	0.15
0.50	0.10

The distributor inspects the entire lot for defective unitsbefore selling the units to PC repair shops at a price of $45 perunit. The inspection process is error-proof so all defective unitsin a lot are detected and replaced by the distributor. It costs $20for the distributor to replace a defective unit. The distributorhas recently learned that the supplier offers a guarantee policythrough which the supplier will assume the cost of replacingdefective units in excess of the first 100 faulty units found in agiven lot at no cost. [This means that the first 100 defectiveunits found in a lot are replaced by the distributor for $20 perunit; however, all additional defective unit (if any) found in alot are replaced by the supplier at no cost to the distributor.]This guarantee policy may be purchased by the distributor prior tothe receipt of a given lot at a cost of $1000 per lot. Thedistributor wants to determine whether it is worthwhile to purchasethe supplier’s guarantee policy.

QUESTION TO BE ANSWERED:

Perform sensitivity analysis: Perform a one-way sensitivityanalysis using PrecisionTree ® on the optimal decision by lettingthe cost of replacing a defective unit vary from $10 to $30 in 11steps and the cost of purchasing the supplier's guarantee policyvary from $400 to $1600 in 7 steps. Comment on your findings.