If the medium-size facility is constructed and the demand turns out to be low, the net...
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If the medium-size facility is constructed and the demand turns out to be low, the net return is estimated at $28 million. Jo-Jo Inc. is a manufacturing firm that produces soap. The company is owned by two brothers, Donald and David Schroeder, and has one plant. The company has experienced significant growth in demand, and the current plant does not appear to have enough capacity to meet demand. The company has decided to build a new plant to meet the additional capacity. However, the brothers must decide whether to build a small, medium, or large plant. The brothers have hired a forecasting consultant to predict demand. The consultant's report indicates that there isas percent chance that the demand will be low and a 75 percent chance that the demand will be high. JE lolo Inc. builds a small facility and the demand indeed turns out to be low, the consultant expects net profit of S40 million, If the firm builds a small plant and the demand turns out to be high, then the firm will have two ontion 340 time: (1) subcontract or (2) expand the facility. If they decide to subcontract, the expected net return will S million. If they expand the new facility, there is 40 percent chance that the net return will be $42 million percent chance that the net return will be $48 million. However, if the medium-size facility is built and the demand turns out to be high, Jo-Jo In. has two optione28 mi time: (1) do nothing, for an expected net return of $48 million, or (2) expand. If the firm decides to expand, nat 35 percent chance that it will earn a net return of $44 million and a 65 percent chance that it will earn a pet iere is $54 million. If the firm decides to build a large facility and demand turns out to be low, the net return will be $10 million. However, if the firm decides to build a large plant and the demand turns out to be high, the expected net retum ie Sce million. Draw a decision tree, solve it and provide a recommendation to Jo-Jo. (Blank page follows for tree diagram) If the medium-size facility is constructed and the demand turns out to be low, the net return is estimated at $28 million. Jo-Jo Inc. is a manufacturing firm that produces soap. The company is owned by two brothers, Donald and David Schroeder, and has one plant. The company has experienced significant growth in demand, and the current plant does not appear to have enough capacity to meet demand. The company has decided to build a new plant to meet the additional capacity. However, the brothers must decide whether to build a small, medium, or large plant. The brothers have hired a forecasting consultant to predict demand. The consultant's report indicates that there isas percent chance that the demand will be low and a 75 percent chance that the demand will be high. JE lolo Inc. builds a small facility and the demand indeed turns out to be low, the consultant expects net profit of S40 million, If the firm builds a small plant and the demand turns out to be high, then the firm will have two ontion 340 time: (1) subcontract or (2) expand the facility. If they decide to subcontract, the expected net return will S million. If they expand the new facility, there is 40 percent chance that the net return will be $42 million percent chance that the net return will be $48 million. However, if the medium-size facility is built and the demand turns out to be high, Jo-Jo In. has two optione28 mi time: (1) do nothing, for an expected net return of $48 million, or (2) expand. If the firm decides to expand, nat 35 percent chance that it will earn a net return of $44 million and a 65 percent chance that it will earn a pet iere is $54 million. If the firm decides to build a large facility and demand turns out to be low, the net return will be $10 million. However, if the firm decides to build a large plant and the demand turns out to be high, the expected net retum ie Sce million. Draw a decision tree, solve it and provide a recommendation to Jo-Jo. (Blank page follows for tree diagram)
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Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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