Develop a decision tree for the case of a company is operating at full capacity
ID: 404203 • Letter: D
Question
Develop a decision tree for the case of a company is operating at full capacity and with product demand rising. The choice is between new equipment and overtime. A 20% rise in sales is anticipated, bringing an increase in profits of $300,000 with new equipment and $150,000 with overtime. But volume might drop 5%; therefore, these are two possible results. If there were a sales drop, profit would be $220,000 with new equipment and $175,000 with overtime. The probabilities are 60% for a sales increase and 40% for a sales decrease.
Explanation / Answer
The management of a company that I shall call Stygian Chemical Industries, Ltd., must decide whether to build a small plant or a
large one to manufacture a new product with an expected market life of ten years. The decision hinges on what size the market
for the product will be.
Possibly demand will be high during the initial two years but, if many initial users find the product unsatisfactory, will fall to a low
level thereafter. Or high initial demand might indicate the possibility of a sustained high-volume market. If demand is high and the
company does not expand within the first two years, competitive products will surely be introduced.
If the company builds a big plant, it must live with it whatever the size of market demand. If it builds a small plant, management
has the option of expanding the plant in two years in the event that demand is high during the introductory period; while in the
event that demand is low during the introductory period, the company will maintain operations in the small plant and make a tidy
profit on the low volume.
Management is uncertain what to do. The company grew rapidly during the 1950
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