A Pacific Northwest Lumber Company Is Considering the Expansion of One

question 42

Essay

A Pacific Northwest lumber company is considering the expansion of one of its mills. The question is whether to do it now, or wait for one year and re?consider. If they expand now, the major factors of importance are the state of the economy and the level of interest rates. The combination of these two factors results in five possible situations. If they do not expand now, only the state of the economy is important, and three conditions characterize the possibilities. The following table summarizes the situation:
$\begin{array}{lll}\text { Expand }& \text { Probabilities } &\text { Revenues }\\\text { very favorable } & 0.2 & \$ 80,000 \\\text { favorable } & 0.2 & \$ 60,000 \\\text { neutral } & 0.1 & \$ 20,000 \\\text { unfavorable } & 0.3 & -\$ 20,000 \\\text { very unfavorable } & 0.2 & -\$ 30,000\\\text { Don't expand }\\\text { expansion } & 0.2 & \$ 50,000 \\\text { steady } & 0.5 & \$ 30,000 \\\text { contraction } & 0.3 & \$ 10,000\end{array}$
a. Using decision tree analysis, what is the expected value (EV) for expanding?
b. Using decision tree analysis, what is the expected value (EV) for not expanding?
c. Based on expected value (EV), what should the company's decision(s) be?

Recognizing non-value added activities and understanding root cause cost drivers in manufacturing processes.

Comprehending the concept of cost drivers and their analysis in cost management.

Grasping the importance and the method of monitoring activity-based performance measures.

Assessing quality costs within a manufacturing setup.

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Definitions:

Materials Handing

The process of moving, safeguarding, storing, managing, and overseeing materials and goods during production, storage, distribution, usage, and disposal.

Wholesaling Functions

Activities involved in selling goods in large quantities at lower prices to retailers or other businesses for resale.

Customer Service

The support and assistance provided by a company to its customers, often aimed at enhancing satisfaction, resolving issues, and fostering loyalty.

Dependability

The quality of being trustworthy and reliable, essential for establishing long-term relationships in personal and professional contexts.