Demand has grown at Dairy May Farms, and it is considering expanding. One option is to expand
Question:
Demand has grown at Dairy May Farms, and it is considering expanding. One option is to expand by purchasing a very large farm that will be able to meet expected future demand. Another option is to expand the current facility by a small amount now and take a wait-and-see attitude, with the possibility of a larger expansion in two years.
Management has estimated the following chances for demand:
• The likelihood of demand being high is 0.75.
• The likelihood of demand being low is 0.25.
Profits for each alternative have been estimated as follows:
• Large expansion has an estimated profitability of either $50,000 or $25,000, depending on whether demand turns out to be high or low.
• Small expansion has a profitability of $15,000, assuming that demand is low.
• Small expansion with an occurrence of high demand would require considering whether to expand further. If the company expands at that point, the profitability is expected to be $40,000.
If it does not expand further, the profitability is expected to be $12,000.
a) Draw a decision tree diagram for Dairy May Farms.
b) Solve the decision tree you developed. What should Dairy May Farms do?
Step by Step Answer:
Operations Management An Integrated Approach
ISBN: 9781119497387
7th Edition
Authors: R. Dan Reid, Nada R. Sanders