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Use the following information: Prakash has to decide whether or not to test a batch of 1000 widgets before sending them to the buyer.
In case he decides to test, he has two options:
a) Use test I ;
b) Use test II.
Test I cost Rs. 2 per widget. However, the test is not perfect. It sends 20% of the bad ones to the buyer as good. Test II costs Rs. 3 per widget. It brings out all the bad ones. A defective widget identified before sending can be corrected at a cost of Rs. 25 per widget. All defective widgets are identified at the buyer's end and penalty of Rs. 50 per defective widget has to be paid by Prakash.
Let's say defective pieces are 300
Using test 1
Cost of testing= $$1000 \times 2 = 2000$$
Cost of correcting 80% pieces = $$240 \times 25 = 6000$$
Cost of penalty on 20% pieces = $$60 \times 50 = 3000$$
Total cost = 11000
Using test 2
Cost of testing = $$1000 \times 3 = 3000$$
Cost of correcting all 300 pieces = $$300 \times 25 = 7500$$
Total cost = 10500
Using no test:
Cost of penalty on all pieces = $$300 \times 50 = 15000$$
Hence, he should use 2nd test.
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