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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.
When there are 200 defective pieces:
Using test 1
Cost of testing= 2000
Cost of correcting 80% pieces = 4000
Cost of penalty on 20% pieces = 2000
Total = 8000
Using test 2
Cost of testing = 3000
Cost of correcting all pieces = 5000
Total = 8000
Using no test
Cost of penalty on all pieces= 10000
Hence he can use either 1st test or second test.
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