A feed manufacturing company is faced with a capacity decision. Their present production facility is running...

  

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A feed manufacturing company is faced with a capacity decision. Their present production facility is running at nearly maximum capacity. Management is considering the following three decision alternatives: a) No expansion b) Add on the present facility c) Build a new facility They believe that if there is a large increase in demand for their product in the near future, they will need to have built a new facility in order to compete and capitalize on more efficient technology and design advances. However, if there is no increase in demand, it might be more profitable to maintain the present facility and add no capacity. A third alternative is to add on to the present facility that will suffice for a moderate increade in demand and will be cheaper than building an entirely new facility. A drawback of adding on to the old facility is that if there is a large increase in demand for their product, an addition to the old facility will preclude capitalizing on new efficiencies that cannot be built into the old plant. Shown in the table below are the payoffs (in $100,000's) for these three decision alternatives, for four different possible states of demand for the company's product. Suppose probabilities have been determined for the states of demand such that there is a 0.30 chance that demand will be less, a 0.15 chance that there will be no change in demand, a 0.35 probability that there will be a moderate increase in demand, and a 0.20 probability that there will be a large increase in demand. State of demand Moderate increase $60 $95 $120 Less No change Large Option: No expansion Add on Build a new facility increase $15 $35 $60 $40 $100 ($10) ($85) $150 $225 a. (4 marks) What option would be recommended under the optimistic approach? b. (4 marks) What option would be recommended under the conservative approach? c. (10 marks) What option would be recommended under the opportunity (minimax) regret approach? d. (15 marks) Use the data to compute the expected value for each option e. (3 marks) Using expected value, and only expected value, which option would you recommend and why? f (18 marks) Use the data to compute the variance for each option g. (3 marks) Using variance, rank the options from most risky to least risky. h. (3 marks) Is there an option that all investors rule out? Explain. i (3 marks) Of the remaining two options, which would be selected by a very risk averse individual? Explain. A feed manufacturing company is faced with a capacity decision. Their present production facility is running at nearly maximum capacity. Management is considering the following three decision alternatives: a) No expansion b) Add on the present facility c) Build a new facility They believe that if there is a large increase in demand for their product in the near future, they will need to have built a new facility in order to compete and capitalize on more efficient technology and design advances. However, if there is no increase in demand, it might be more profitable to maintain the present facility and add no capacity. A third alternative is to add on to the present facility that will suffice for a moderate increade in demand and will be cheaper than building an entirely new facility. A drawback of adding on to the old facility is that if there is a large increase in demand for their product, an addition to the old facility will preclude capitalizing on new efficiencies that cannot be built into the old plant. Shown in the table below are the payoffs (in $100,000's) for these three decision alternatives, for four different possible states of demand for the company's product. Suppose probabilities have been determined for the states of demand such that there is a 0.30 chance that demand will be less, a 0.15 chance that there will be no change in demand, a 0.35 probability that there will be a moderate increase in demand, and a 0.20 probability that there will be a large increase in demand. State of demand Moderate increase $60 $95 $120 Less No change Large Option: No expansion Add on Build a new facility increase $15 $35 $60 $40 $100 ($10) ($85) $150 $225 a. (4 marks) What option would be recommended under the optimistic approach? b. (4 marks) What option would be recommended under the conservative approach? c. (10 marks) What option would be recommended under the opportunity (minimax) regret approach? d. (15 marks) Use the data to compute the expected value for each option e. (3 marks) Using expected value, and only expected value, which option would you recommend and why? f (18 marks) Use the data to compute the variance for each option g. (3 marks) Using variance, rank the options from most risky to least risky. h. (3 marks) Is there an option that all investors rule out? Explain. i (3 marks) Of the remaining two options, which would be selected by a very risk averse individual? Explain.

Answer rating: 100% (QA)

Step 1 We will first calculate the expected value or mean Probability of chance is given for each option p is the probability for each possible state ... View the full answer