Case Study – Bell Computer Company The Bell Computer Company is considering a pl

Question

Case Study – Bell Computer Company The Bell Computer Company is considering a plant expansion enabling the company to begin production of a new computer product. You have obtained your MBA from the University of Phoenix and, as a vice-president, you must determine whether to make the expansion a medium- or large- scale project. The demand for the new product involves an uncertainty, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for the demands are 0.20, 0.50, and 0.30, respectively. Case Study – Kyle Bits and Bytes Kyle Bits and Bytes, a retailer of computing products sells a variety of computer-related products. One of Kyle’s most popular products is an HP laser printer. The average weekly demand is 200 units. Lead time (lead time is defined as the amount of time between when the order is placed and when it is delivered) for a new order from the manufacturer to arrive is one week. If the demand for printers were constant, the retailer would re-order when there were exactly 200 printers in inventory. However, Kyle learned demand is a random variable in his Operations Management class. An analysis of previous weeks reveals the weekly demand standard deviation is 30. Kyle knows if a customer wants to buy an HP laser printer but he has none available, he will lose that sale, plus possibly additional sales. He wants the probability of running short (stock-out) in any week to be no more than 6%. : Bell Computer Company • Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? • Compute the variation for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty? Kyle Bits and Bytes • What should be the re-order point? How many HP laser printers should he have in stock when he re-orders from the manufacturer?

Explanation / Answer

Medium-Scale is prefered as it has low value of sd and hence its mean is reliable. Also its mean profit is more as comapred to lar scale.

Medium-Scale Large-Scale Expansion Profits Expansion Profits Annual Profit
($1000s) P(x) Annual Profit
($1000s) P(x) Demand Low 50 20% 0 20% Medium 150 50% 100 50% High 200 30% 300 30% Expected Profit ($1000s) 145 140 Risk Analysis for Medium-Scale Expansion Demand Annual Profit (x)
$1000s Probability P(x) (x - µ) (x - µ)2 (x - µ)2 * P(x) Low 50 20% -95 9025 1805 Medium 150 50% 5 25 12.5 High 200 30% 55 3025 907.5 2 = 2725 = 52.2015325 Risk Analysis for Large-Scale Expansion Demand Annual Profit (x)
$1000s Probability P(x) (x - µ) (x - µ)2 (x - µ)2 * P(x) Low 0 20% -140 19600 3920 Medium 100 50% -40 1600 800 High 300 30% 160 25600 7680 2 = 12400 = 111.355287

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