Question

1. HOMIE food manufacturing company needs to make capacity decisions to produce a new product line to export to the regional market. As chief operations officer of this company, you are considering three options in the face of considerable uncertainties over the next four years:

   Option 1: Build a new factory,

- New site cost is $6 million,

- Payoffs: Strong demand = $12 million; Weak demand= $10 million.

Option 2: Expand at current site,

• - Expanding current site cost is $9 million,

• - Payoffs: strong growth = $14 million; weak growth = $10 million.

  Option 3: Do nothing. Not constructing a new factory or expanding at the current site would result in no additional revenue being generated because the current facility is not able to produce the new product line.

  Use decision tree technique to help HOMIE in evaluating the capacity alternatives. Assume the probability of demand being strong is 40%. (Note that you need to construct the decision tree in your answer.)

Answer 1

Answer : Capacity Expansion at option 2 will give company a great profit. Find attached photo for decision tree