23. Consider the two capacity options for Arktec Manufacturing shown below: Fixed cost (per year) Option...

 

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23. Consider the two capacity options for Arktec Manufacturing shown below: Fixed cost (per year) Option 1 Option 2 Name: 500,000 100,000 Variable cost (per unit) 2 10 Suppose the company has identified the following three possible demand scenarios: Demand (units per year) 25,000 50,000 75,000 Probability 30% 50% 20% a. Draw a decision tree for Arktec Manufacturing. When drawing your tree, assume that managers must select a capacity option before they know what the demand level will actually be. b. Calculate the expected value for each decision branch. Which option would you prefer? Why? c. Suppose the lowest and highest demand levels are updated to 40,000 and 110,000, respectively. Recalculate the expected values. Which option would you prefer now? 1946 23. Consider the two capacity options for Arktec Manufacturing shown below: Fixed cost (per year) Option 1 Option 2 Name: 500,000 100,000 Variable cost (per unit) 2 10 Suppose the company has identified the following three possible demand scenarios: Demand (units per year) 25,000 50,000 75,000 Probability 30% 50% 20% a. Draw a decision tree for Arktec Manufacturing. When drawing your tree, assume that managers must select a capacity option before they know what the demand level will actually be. b. Calculate the expected value for each decision branch. Which option would you prefer? Why? c. Suppose the lowest and highest demand levels are updated to 40,000 and 110,000, respectively. Recalculate the expected values. Which option would you prefer now? 1946

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SOLUTION Decision tree following 575000 Select Option 1 500000 ... View the full answer