The Construction Manager for Acme Construction, Inc A If He Uses the Maximin Criterion, Which Type of to Build

question 15

Essay

The construction manager for Acme Construction, Inc. must decide whether to build single family homes, apartments, or condominiums. This is not a product-mix problem, but an all-or nothing decision. He will hire workers and rent equipment appropriate for one action only. He estimates annual profits (in thousands of dollars) will vary with population trends as follows:
$\begin{array}{|c|c|c|c|}\hline \text { Dwelling type } & \text { Population steady } & \frac{\text { Population grows }}{\text { slowly }} & \frac{\text { Population grows }}{\text { rapidly }} \\\hline \text { Single family } & \$ 100 & \$ 90 & \$ 70\\\hline \text { Apartments } & 50 & 170 & 90 \\\hline \text { Condominiums } & -20 & 100 & 220\\\hline\end{array}$
a. If he uses the maximin criterion, which type of dwellings will he choose to build?
Show your supporting calculations.
b. If he uses the equally likely criterion, which kind of dwellings will he choose to build?
Show your supporting calculations.
c. If the construction manager were an optimist, what criterion would he choose?
What would be the choice of dwelling for that criterion?
Show your supporting calculations.

---

Definitions:

Fixed Expenses

Costs that do not fluctuate with the level of production or sales, such as rent, salaries, and insurance premiums.

Variable Expenses

Costs that change in proportion to the activity or volume of production in a business.

Variable Expense Ratio

The proportion of variable expenses to total sales, indicating how variable costs change with changes in sales volume.

Unit Contribution Margin

The difference between the selling price per unit and the variable cost per unit. This margin helps determine how each unit sold contributes to fixed costs and profits.