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As operations manager of Holz Furniture, 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 $400,000; a small process line will cost $350,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Rosalita Ferrera of Ferrera Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales as large as $650,000 and a one-out-of-three chance as low as $350,000. With a large process line, you could handle the high figure of $650,000. 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 $650,000 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 $400,000. If you build a small process and the demand is low, you can handle all of the demand. The decision tree for Holz Furniture to determine the best option is shown in

As operations manager of Holz Furniture, 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 $400,000; a small process line will cost $350,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Rosalita Ferrera of Ferrera Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales as large as $650,000 and a one-out-of-three chance as low as $350,000. With a large process line, you could handle the high figure of $650,000. 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 $650,000 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 $400,000. If you build a small process and the demand is low, you can handle all of the demand. The decision tree for Holz Furniture to determine the best option is shown in

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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As operations manager of Holz Furniture, 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 $400,000; a small process line will cost $350,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Rosalita Ferrera of Ferrera Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales as large as $650,000 and a one-out-of-three chance as low as $350,000. With a large process line, you could handle the high figure of $650,000. 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 $650,000 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 $400,000. If you build a small process and the demand is low, you can handle all of the demand. The decision tree for Holz Furniture to determine the best option is shown in
Transcribed Image Text:As operations manager of Holz Furniture, 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 $400,000; a small process line will cost $350,000. The question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Rosalita Ferrera of Ferrera Market Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales as large as $650,000 and a one-out-of-three chance as low as $350,000. With a large process line, you could handle the high figure of $650,000. 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 $650,000 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 $400,000. If you build a small process and the demand is low, you can handle all of the demand. The decision tree for Holz Furniture to determine the best option is shown in
Figure 1 Large Line Figure 2 Small Line, Hi 2/3 Large Line Figure 3 Hi Small Line, Large Line 2/3 2/3 Hi 1/3 Hi Expand Small Line, 2/3 Not Expand 2/3 Low Low 1/3 Low Not Expand 2/3 1/3 O$0 Hi Expand 1/3 Low Hi 1/3 Low Expand Not Expand $250,000 Low - $50,000 $25,000 $50,000 $250,000 - $50,000 $25,000 $50,000 $0 $250,000 - $50,000 $25,000 $50,000 1/3 O$0
Transcribed Image Text:Figure 1 Large Line Figure 2 Small Line, Hi 2/3 Large Line Figure 3 Hi Small Line, Large Line 2/3 2/3 Hi 1/3 Hi Expand Small Line, 2/3 Not Expand 2/3 Low Low 1/3 Low Not Expand 2/3 1/3 O$0 Hi Expand 1/3 Low Hi 1/3 Low Expand Not Expand $250,000 Low - $50,000 $25,000 $50,000 $250,000 - $50,000 $25,000 $50,000 $0 $250,000 - $50,000 $25,000 $50,000 1/3 O$0
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