Concept explainers
(a)
Interpretation: The company has decided to build a second plant, as full capacity has been achieved by the present manufacturing unit. The second plant may be large or small, located at a nearby area and the demand may be low or high, while
(b)
Interpretation: The company has decided to build a second plant, as full capacity has been achieved by the present manufacturing unit. The second plant may be large or small, located at a nearby area and the demand may be low or high, while
Concept Introduction: The measure of likelihood that an event will happen, in a random experiment is called probability.
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Operations Management: Processes and Supply Chains, Student Value Edition Plus MyLab Operations Management with Pearson eText -- Access Card Package (12th Edition)
- A manager is trying to decide whether to build a small,medium, or large facility. Demand can be low, average,or high, with the estimated probabilities being 0.25, 0.40,and 0.35, respectively.A small facility is expected to earn an after-tax net pres-ent value of just $18,000 if demand is low. If demand isaverage, the small facility is expected to earn $75,000; it canbe increased to medium size to earn a net present value of$60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn$60,000 or to large size to earn $125,000.A medium-sized facility is expected to lose an estimated$25,000 if demand is low and earn $140,000 if demand isaverage. If demand is high, the medium-sized facility isexpected to earn a net present value of $150,000; it can beexpanded to a large size for a net payoff of $145,000.If a large facility is built and demand is high, earningsare expected to be $220,000. If demand is average for thelarge facility, the…arrow_forwardA firm must decide whether to construct a small, medium, or large stamping plant. A consultant’sreport indicates a .20 probability that demand will be low and an .80 probability that demand willbe high.If the firm builds a small facility and demand turns out to be low, the net present value will be$42 million. If demand turns out to be high, the firm can either subcontract and realize the net present value of $42 million or expand greatly for a net present value of $48 million.The firm could build a medium-size facility as a hedge: If demand turns out to be low, its netpresent value is estimated at $22 million; if demand turns out to be high, the firm could do nothingand realize a net present value of $46 million, or it could expand and realize a net present value of$50 million.If the firm builds a large facility and demand is low, the net present value will be – $20 million,whereas high demand will result in a net present value of $72 million.a. Analyze this problem using a decision…arrow_forwardA firm must decide whether to construct a small, medium or large stamping plant. A consultant’s report indicates a 0.20 probability that demand will be low and 0.80 that demand will be high. If the firm builds a small facility and demand turns out to be low, the Net Present Value (NPV) willbe $42M. If demand turns out to be high, the firm can either subcontract and realize the NPV of $42M orexpand greatly for a Net Present Value of $48M. The firm could build a medium size facility as a hedge: if demand turns out to be low, its NPV is estimated at $22M; if demand turns out to be high, the firm could do nothing and realize a NPV of $46M, or could expand and realize a NPV of $50M. If the firm builds a large facility and demand is low, the NPV will be ($20M), whereas high demand will result in a NPV of $72M. Compute the EVPI *arrow_forward
- Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that ther is a probability of 0.40 that the ATR Co. does not follow with a competitive product. Weiss's expected profit is $50,000; If weiss adds an assembley line and ATR follows suit, Weiss still expects $15,000 profit. If Weiss adds a new plant addition adn ATR does not produce a competitive product, weiss expects a profit of $600,000; if ATR does compete for this market, weiss expects a loss of $100,000 a) Expected value for the Add Assembly Line option=$____arrow_forwardMaverick Ltd is considering whether to develop and market a new product. Development the costs are estimated to be R180 000, and there is a 0.75 probability that development effort will be successful and a 0.25 probability that the development effort will be unsuccessful. If the development is successful, the product will be marketed and it is estimated that:a. If the product is very successful profits will be R540 000;b. If the product is moderately successful profits will be R100 000;c. If the product is a failure, there will be a loss of R400 000.Each of the above profit and loss calculations is after taking into account the development costs of R180 000. The estimated probabilities of each of the above events are as follows:d. Very successful 40%e. Moderately successful 30%f. Failure 30%Required3.1. Construct a decision tree to illustrate the scenario above (7)3.2. Calculate the Expected Value (8)arrow_forwardA new minor league baseball team is coming to town and the owners have decided to build a new stadium, either small or large. The success of the team with regard to ticket sales will be either high or low with probabilities of 0.75 and 0.25, respectively. If demand for tickets is high, the large stadium would provide a payoff of approximately $20 million. If ticket sales are low, the loss on the large stadium would be $5 million. If a small stadium is constructed, and ticket sales are low, the payoff is $500,000 after deducting the cost of construction. If ticket sales are high, the team can choose to build an upper deck, or to maintain the existing facility. Expanding the stadium in this scenario has a payoff of $10 million, whereas maintaining the same number of seats has a payoff of only $3 million. a. Draw a decision tree for this problem. b. What should management do to achieve the highest expected payoff?arrow_forward
- Option 2: Raise prices by 50%. If this occurs, there is a 75% chance that an Entrepreneur will set up in competition this year. The board’s estimate of its annual profit in this situation would be as follows: 2A: With new competitor 2B: Without new competitor Probability Profit (Sh.) Probability Profit (Sh.) 0.25 150,000 0.5 200,000 0.5 120,000 0.3 150,000 0.25 80,000 0.2 100,000 Option 3: Expand the car park quickly at a cost of Sh. 50,000 keeping prices theSame. The profits are then estimated to be like 2B above, except that the probabilities would be 0.6, 0.3 and 0.1 respectively. Required: Draw a decision tree for the above problem, including all the relevant data. Using expected values analyze the decision tree and recommend the best option to the owners of the car park.arrow_forward3-36 A group of medical professionals is considering the construction of a private clinic. If the medical demand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the physicians’ best guess is that there is a 50–50 chance the clinic will be successful. Construct a decision tree to help analyze this problem. What should the medical professionals do? (Construct a small decision tree from this problem, do the calculations/decisions, and highlight the final decision of the medical professionals.)arrow_forward3-36 A group of medical professionals is considering the construction of a private clinic. If the medical demand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the physicians’ best guess is that there is a 50–50 chance the clinic will be successful. Construct (Draw) a small decision tree from this problem, do the calculations/decisions, and highlight the final decision of the medical professionals.arrow_forward
- Herndon Development Group (HDG) is planning for a new investment. They would like to make a sequence of decisions that start with determining whether to purchase an apartment building or land. Cost of purchasing an apartment is $800,000 and purchasing land is $200,000. If HDG purchases the apartment building, two states of nature are possible: The town may exhibit population growth, with a probability of 0.60, or there may be no population growth or a decline, with a probability of .40. If the population grows, the investor will achieve a revenue of $2,000,000. However, if there is no population growth, the revenue is $250,000. If the decision is to purchase land, the investor will wait for 3 years and consider developing the land based on the population growth. The probability of a growing population is .60, whereas the probability of a stable or declining population is 0.40. If population growth occurs for a 3-year period, the investor will make another decision regarding land…arrow_forwardA manager is quite concerned about the recent deterioration of a section of the roof on a building that houses her firm’s computer operations. According to her assistant there are three options which merit consideration: I, II, and III. Moreover, there are three possible future conditions that must be included in the analysis: A, which has a probability of occurrence of .25; B, which has a probability of .6; and C, which has a probability of .15. If condition A materializes, I will cost $12000, II will cost $20000, and III will cost $16000. If condition B materializes, the costs will be $15000 for I, $18000 for II, and $14000 for III. If condition C materializes, the costs will be $10000 for I, $15000 for I, and $19000 for III. (A) Draw a decision tree for this problem. (B) Using expected monetary value, which alternative should be chosenarrow_forwardA group of medical professionals is considering the construction of a private clinic. If the medical de-mand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the physicians’ best guess is that there is a 50–50 chance the clinic will be successful. Construct a decision tree to help analyze this problem. What should the medical professionals do? Need to construction a Decision Tree using in Excel OM/QM, so if you could an use excel spreadsheet to solve, this would be ideaarrow_forward
- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,