A Firm Is Considering the Decision of Investing in New $\quad$

question 6

Multiple Choice

A firm is considering the decision of investing in new plants.It can choose no new plants,one new plant,or two new plants.The following table gives the profits for each choice under three states of the economy.The manager assigns the following probabilities to each state of the economy: the economy expands,20%,the economy contracts,40%,or the economy is unchanged 40%. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { The economy }$
$\begin{array}{lccc} & \text { expands }(0.20) & \text { contracts }(0.40) & \text { unchanged }(0.40) \\ \text { no new plants } & \$ 10 \text { million } & -\$ 2 \text { million } & \$ 3 \text { million } \\1 \text { new plant } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 7 \text { million } \\2 \text { new plants } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 5 \text { million }\end{array}$
Using the coefficient of variation rule,the firm should build

• A)no new plants.
• B)one new plant.
• C)two new plants.
• D)cannot tell with this information

---

Definitions:

Operations

Refers to the daily activities involved in running a business, which can include production, marketing, and product development.

Variable Costs

Costs that change in proportion to the volume of goods or services produced.

Per-unit Basis

A method of calculation or evaluation by considering individual units or items, allowing for analysis or comparison.

Activity Level

In cost accounting, the volume of output or production that impacts the cost of a specific activity.