Spectrum Hair Salon is considering expanding itsbusiness, as it is experiencing a large growth. Th e question iswhether it should expand with a bigger facility than needed,hoping that demand will catch up, or with a small facility,knowing that it will need to reconsider expanding in three years.Th e management at Spectrum has estimated the followingchances for demand:• Th e likelihood of demand being high is 0.70.• Th e likelihood of demand being low is 0.30.Estimated profi ts for each alternative are as follows:• Large expansion has an estimated profi tability of either$100,000 or $70,000, depending on whether demand turnsout to be high or low.• Small expansion has a profi tability of $50,000, assuming thatdemand is low.• Small expansion with an occurrence of high demand wouldrequire considering whether to expand further. If thebusiness expands at this point, the profi tability is expected tobe $90,000. If it does not expand further, the profi tability isexpected to be $60,000.
Spectrum Hair Salon is considering expanding its
business, as it is experiencing a large growth. Th e question is
whether it should expand with a bigger facility than needed,
hoping that demand will catch up, or with a small facility,
knowing that it will need to reconsider expanding in three years.
Th e management at Spectrum has estimated the following
chances for demand:
• Th e likelihood of demand being high is 0.70.
• Th e likelihood of demand being low is 0.30.
Estimated profi ts for each alternative are as follows:
• Large expansion has an estimated profi tability of either
$100,000 or $70,000, depending on whether demand turns
out to be high or low.
• Small expansion has a profi tability of $50,000, assuming that
demand is low.
• Small expansion with an occurrence of high demand would
require considering whether to expand further. If the
business expands at this point, the profi tability is expected to
be $90,000. If it does not expand further, the profi tability is
expected to be $60,000.
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