As operations manager of Holz Furmiture, you must make a decision about adding a line of rustic furniture. In discussing the possibilities with your sales manager, Steve Gilbert, you decide that there will definitely be a market and that your firm should enter that market. However, because rustic furniture has a different finish than your standard offering. you decide you need another process line. There is no doubt in your mind about the decision, and you are sure that you should have a second process. But you do question how large to make it. A large process line is going to cost $450,000; a small process line will cost $325,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Tim Ireland of Ireland Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of high demand resulting in $625,000 profit from sales and a one-out-of-three chance of low demand resulting in $325,000 profit from sales. With a large process line, you could handle the high figure of $625,000. However, with a small process line you could not and would be forced to expand (at a cost of $125,000). after which time your profit from sales would be $500,000 rather than the $625,000 because of the lost time in expanding the process. If you do not expand the small process, your profit from sales would be held to $450,000. If you build a small process and the demand is low, you can handle all of the demand. The best option is to open a large line. with an expected value of $ 75000 (round your response to the nearest whole number).
As operations manager of Holz Furmiture, you must make a decision about adding a line of rustic furniture. In discussing the possibilities with your sales manager, Steve Gilbert, you decide that there will definitely be a market and that your firm should enter that market. However, because rustic furniture has a different finish than your standard offering. you decide you need another process line. There is no doubt in your mind about the decision, and you are sure that you should have a second process. But you do question how large to make it. A large process line is going to cost $450,000; a small process line will cost $325,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Tim Ireland of Ireland Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of high demand resulting in $625,000 profit from sales and a one-out-of-three chance of low demand resulting in $325,000 profit from sales. With a large process line, you could handle the high figure of $625,000. However, with a small process line you could not and would be forced to expand (at a cost of $125,000). after which time your profit from sales would be $500,000 rather than the $625,000 because of the lost time in expanding the process. If you do not expand the small process, your profit from sales would be held to $450,000. If you build a small process and the demand is low, you can handle all of the demand. The best option is to open a large line. with an expected value of $ 75000 (round your response to the nearest whole number).
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter11: Strategic Cost Management
Section: Chapter Questions
Problem 12E: The following series of statements or phrases are associated with product life-cycle viewpoints....
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Transcribed Image Text:As operations manager of Holz Furmiture, you must make a decision about adding a line of rustic furniture. In discussing the possibilities with your sales manager, Steve Gilbert,
you decide that there will definitely be a market and that your firm should enter that market. However, because rustic furniture has a different finish than your standard offering,
you decide you need another process line. There is no doubt in your mind about the decision, and you are sure that you should have a second process. But you do question how
large to make it. A large process line is going to cost $450,000; a small process line will cost $325,000. The question, therefore, is the demand for rustic funiture. After extensive
discussion with Mr. Gilbert and Tim Ireland of Ireland Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of high
demand resulting in $625,000 profit from sales and a one-out-of-three chance of low demand resulting in $325,000 profit from sales.
With a large process line, you could handle the high figure of $625,000. However, with a small process line you could not and would be forced to expand (at a cost of $125,000).
after which time your profit from sales would be $500,000 rather than the $625,000 because of the lost time in expanding the process. If you do not expand the small process,
your profit from sales would be held to $450,000. If you build a small process and the demand is low, you can handle all of the demand.
The best option is to open a large line , with an expected value of $75000 (round your response to the nearest whole number).
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