Question

This Question: 5 pts 23 of 45 As operations manager of Holz Funiture, you must make a decision about adding a line of rustic furniture. In discussing the possibilšies should enter that market However, because rustic furniture has a different finish than your standard offering, you decide with your sales manager, Steve Gilbert, you decide that there will definitely be a market and that your firm you need another process line. There is no doubt in your mind about the decision, and you are sure that you should have a second process. But you do question how large to make it. A large process line is going to cost $450,000; a small process line will cost $325,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Tim Ireland of Ireland Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales as large as $650,000 and a one-out-of-three chance as low as $350,000 With a large process line, you could handle the high figure of $650,000. However, with a small process line you could not and would be forced to expand (at a cost of $125,000), after which time your profit from sales would be $525,000 rather han the $850,000 because of the lost time in expanding the process. If you do not expand the small process, your proft rom sales would be held to $450,000. If you build a small process and the demand is low, you can handle all of the The decision tree for Holz Furniture to determine the best option is shown in Cick to select your answers) ?0 2 4. tab

Answer 1

-650000-450000 -2/3 Hi Large Line 1/3 350000-450000 Low 525000-125000-325000 nd Small Line Hi Not Expand 450000-325000 1/3 -350000-325000 Low

$200,000 0.67 Hi Large Line 0.33 100,000) $ 75,000 Ex Small Li Hi 0.67 Not Expand 125,000 0.33 $ 25,000 Lo
Answer is Figure 3