Capacity Decisions $(30$ marks$)$

Consider the two capacity options for Arktec Manufacturing shown below:

Annual Fixed Costs Variable Cost per Unit

Option $1500,0002$

Option $2100,00010$

The following are three scenarios identified by Arktec:

Annual Demand Probability

$25,00030\%$

$60,00040\%$

$100,00030\%$

a$)$ What is the expected value of each option? Which option should be chosen based on these values? $(5$ marks$)$

b$)$ If the lowest and highest estimates are updated to $40,000$ and $110,000$ respectively, what would be the updated expected values? Explain what has happened. $(5$ marks$)$

c$)$ Draw the decision tree for Arktec Manufacturing using initial data. You are to assume that a capacity option is chosen before demand levels are known. $(15$ marks$)$

d$)$ Calculate the expected value for each branch. Which option would you choose and why? $(5$ marks$)$