Analysis and using an expected value approach

Assignment Help Operation Management

Reference no: EM131126546

ABC Company is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $6 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $7 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million. In either case, the probability of demand being high is 0.20 and the probability of it being low is 0.80. Not constructing a new factory would result in no addition revenue being generated because the current factories cannot produce these new products. For this analysis, use only the information provided.

a) Construct a decision tree to help ABC make the best decision.

b) Based on your analysis and using an expected value approach, which facility should be built?

c) Suppose the probability of the demand being low is uncertain at this time. Since the probability of low demand is uncertain, this would also mean the probability of demand being high is also uncertain. With everything else remaining the same as in a), what is the probability of low demand that make the two facility options equal based on the expected values.

d) Provide an interpretation of the results you found in c).

Reference no: EM131126546

Questions Cloud

Goal programming problem with single weighted priority : The campaign headquarters of Debbie Smith, a candidate for the Board of Supervisors, has 100 volunteers. With one week to go in the election, there are three major strategies remaining: media advertising, door-to-door canvassing, and telephone campai..

What is the multifactor productivity performance : Student tuition at ABC University is $150 per semester credit hour. The state supplements school revenue by matching student tuition dollar for dollar. In other words, for each dollar a student pays in tuition, the state pays a dollar that is also co..

Statements concerning production and staffing plans : Which one of the following statements concerning production and staffing plans is FALSE?

Discuss the different types of knowledge processes : Discuss the different types of knowledge processes within an organization that focus on the acquisition of new knowledge vs. those processes that build on existing knowledge. Then, discuss how these processes promote capability development in an orga..

Analysis and using an expected value approach : ABC Company is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $6 ..

Complex and geographically dispersed business organizations : MNEs are the ultimate large, complex and geographically dispersed business organizations. The text presents three clear implications for savvy managers. List and briefly explain these three Implications for Action.

Cost reduction and local responsiveness : MNEs confront primarily two sets of pressures: cost reduction and local responsiveness. These two sets of pressures are dealt with in the integration-responsiveness framework, which allows managers to deal with the pressures for both global integrati..

Case study on trop nosh : CASE Study on Trop Nosh, Task: By reference to the Competition and Consumer Act 2010 (Cth), Australian intellectual property law and associated case law, advise Trop Nosh - and its Managing Director personally where relevant - as to their respective ..

Statements about demand management : Which one of the following statements about demand management is FALSE?

User Account

All Pages