Cement $mathrm{Co}$ is a listed company specialising in the manufacture of cement, a product used in the
Question:
Cement $\mathrm{Co}$ is a listed company specialising in the manufacture of cement, a product used in the building industry. The company has been a major player in the construction sector of European country, Q, since its formation in 1987. It is passionate about customer care and proud of its active approach to safety and sustainability (recognising the need to minimise any adverse environmental impact of its operations).
The company operates in a very traditional industry but profits can be volatile. Q's economy has been in recession for the last three years and this has had a direct impact on Cement Co's profitability. Shareholders are concerned about this fall in profit and have expressed their desire for a secure return. Competitors, keen to find ways of increasing profit and market share, in these difficult economic circumstances, have started to increase the level of investment in research and development, ensuring their products anticipate and meet the needs of its customers.
When $Q$ entered recession, many workers left the country in search of more lucrative and secure work. This has had a significant impact on Cement Co which is now facing labour shortages and increased labour costs. At the same time, suppliers have also increased their prices putting further pressure on Cement Co's margins.
The company has found that when weather conditions are good, the demand for cement increases since more building work is able to take place. Last year, the weather was so good, and the demand for cement was so great, that Cement Co was unable to meet demand. Cement Co is now trying to work out the level of cement production for the coming year in order to maximise profits. The company doesn't want to miss out on the opportunity to earn large profits by running out of cement again. However, it doesn't want to be left with large quantities of the product unsold at the end of the year, since it deteriorates quickly and then has to be disposed of. The company has received the following estimates about the probable weather conditions and corresponding demand levels for the coming year:
Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed of at a cost of $0.50 per bag.
Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of cement production to select. As an incentive to increase profitability a new bonus scheme has just been introduced for a select group of Cement Co's directors. A bonus will be received by each of these directors if annual profit exceeds a challenging target.
Required:
Evaluate the proposed levels of cement production using methods for decision making under risk and uncertainty and assess the suitability of the different methods used.
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