A Manufacturing Company Is Considering Expanding Its Production Capacity to Meet

question 13

Essay

A manufacturing company is considering expanding its production capacity to meet a growing demand for its product line of air fresheners.The alternatives are to build a new plant,expand the old plant,or do nothing.The marketing department estimates a 35 percent probability of a market upturn,a 40 percent probability of a stable market,and a 25 percent probability of a market downturn.Georgia Swain,the firm's capital appropriations analyst,estimates the following annual returns for these alternatives: $$\begin{array} { l c c c } \hline \hline& \text { Market } & \text { Stable } & \text { Market } \\& \underline { \text { Upturn } } & \underline { \text { Market } } & \underline { \text { Downturn } } \\\text { Build new plant } & \$ 690,000 & \$ ( 130,000 ) & \$ ( 150,000 ) \\\text { Expand old plant } & 490,000 & ( 45,000 ) & ( 65,000 ) \\\text { Do nothing } & 50,000 & 0 & ( 20,000 ) \\\hline \hline\end{array}$$
a. Use a decision tree analysis to analyze these decision alternatives.
b. What should the company do?
c. What returns will accrue to the company if your recommendation is followed?

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