Based on expected values and using decision tree approach

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Reference no: EM132274879

Spencerville Products is expanding its operations west of the Mississippi. Its first step is to build a manufacturing facility in Denver to satisfy demand on the West Coast it will not produce any items not needed to meet demand. Spencerville has an option to build either a large facility that has an annual output of 500,000 units per year or a smaller facility with an output of 250,000 units per year. It must build one of these two facilities - it does not have any other options.

The expected demand for the company's products is shown as either high or moderate in the table below:

Demand Level Annual Demand (units/year) Probability

High 450,000 0.6

Moderate 200,000 0.4

The small facility has a profit of $5.50 per unit. The large facility has a profit of $4.00/unit.

a) What size facility should Spencerville Products build based on expected values and using a decision tree approach? You must also provide the decision tree using the appropriate decision tree symbols.

b) Keeping all other information except for the profit per unit for the small facility items, what would the profit per unit for the small facility have to be so that the expected values of the large and small facilities are equal?

Reference no: EM132274879

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