Question

decide that Steve Gilbert, As operations manager of Holz Furniture, you must make a decision about adding a line of rustic furniture. In discussing the possibilities with your sales mar there will definite ly be a market and that your firm should enter that market. However, because rustic furniture has a different finish than your standard offering, you decide 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 $400,000; Research, Inc., you determine that the best estimate you can make chance of low demand resulting in $300,000 profit from sales. 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 that there is a two-out-of-three chance of high demand resulting in $650,000 profit from sales and a one-out-of-three SEnndle 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 $175,000), after which time SA00.000, If you build a small process and the demand is low, you can hand le all of the demand g the process. If you do not expand the small process, your profit from sales would be held With a large process line, you ,with an expected value of $(round your response to the nearest whole number). The best option is to open a small line large line

Answer 1

LaVe C50, 006 hiak derndnd Loskge aime 4CC Low demand e Bolo co0 extard $S0,000 Hi97 demand(a Dohot expand Apo,000 Stomale one 306 006 LOwdamand

Expected value at node 1 = Expected payoff(large line) = 2/3*650000 + 1/3*300000 - 400000= 133333.3333

Expected value at node 3 = Max [(550,000 - 175,000),400,000] = Max(375000,400000) = 400000

Expected value at node 2 = Expected payoff(Small line) = 2/3*400000+1/3*300000 - 325000 = 41666.66667

So, we can see Expected payoff is higher for Large line

The best option is to open a Large line, with an expected value of $133333 (Rounded to nearest whole number)