Question

The DoorCo Corporation is a leading manufacturer of garage doors. All doors are manufactured in their plant in Carmel, Indiana, and shipped to distribution centers or major customers. DoorCo recently acquired another manufacturer of garage doors, Wisconsin Door, and is considering moving its wood door operations to the Wisconsin plant. Key considerations in this decision are the transportation, labor, and production costs at the two plants. Complicating matters is the fact that marketing is predicting a decline in the demand for wood doors. The company developed the following three scenarios:
Scenario 1 (Probability of happening 0.15): Demand falls slightly, with no noticeable effect on production
Scenario 2 (Probability of happening 0.40): Demand and production decline 20%
Scenario 3 (Probability of happening 0.45): Demand and production decline 40%

The following table shows the total costs under each decision and scenario.

Use this information to answer the following:
a) What is the Expected Value of the decision "Stay in Carmel"
b) What is the Expected Value of the decision "Move to Wisconsin"
c) Should DoorCo Stay in Carmel or Move to Wisconsin? Explain your answer.

Answer 1

Payoff table is following:

0.15 0.4 0.45 Slight Decline 20% Decline 40% Decline Expected Payoff 1000 900 840 888 1200 915 800 906 Stay In Carmel Move to Wisconsin

In the above table, the payoffs are $ thousands

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a) What is the Expected Value of the decision "Stay in Carmel" = 0.15*1000+0.4*900+0.45*840

= $ 888 thousands

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b) What is the Expected Value of the decision "Move to Wisconsin" = 0.15*1200+0.4*915+0.45*800

= $ 906 thousands

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c) Should DoorCo Stay in Carmel or Move to Wisconsin?

Expected Value of Move to Wisconsin is higher at $ 906 thousands.

Therefore, DoorCo should Move to Wisconsin