Reference no: EM132146006

Decision tree analysis for Jackson Medical Diagnostics Lab is a small lab providing medical testing for doctors and hospitals. It was founded 10 years ago, has a good reputation among local doctors, and has been experiencing strong growth the past two years. Jackson's general manager knows from a relatively recent operations management analysis that the lab's design capacity is 340 patients per day, its effective capacity is 310 patients per day, and the lab currently processes 295 patients per day. The general manager is concerned that the lab will not have the capacity to meet future demand unless the lab is expanded. She has hired a market research firm to study the demand for the lab's services in the area.

After completing its study, the market research firm predicted that there is a .60 probability of continued high demand (PH) for the lab's services over the next five years, and a .40 probability of low demand (PL). Based on that, Jackson's general manager has decided to move forward with an expansion. However, she is not sure whether she should do a small expansion (SE) by taking over some adjacent vacant office space that has recently become available, or do a large expansion (LE) by moving the lab to a different floor of the same building.

The general manager has worked with the lab's finance manager to come up with an estimate that a small expansion would have a profitability of $35,000 if the demand for the lab's services is low (ProfitSmallLow). If the lab undertakes a small expansion and the demand for the lab's services is high, the lab would likely have to undertake a second small expansion (assuming appropriate space was available), and the profitability of the two expansions would be $55,000 (ProfitSmallHigh). If the lab undertakes a large expansion, the profit would be $90,000 if the demand for its services is high (ProfitLargeHigh), but only a $52,000 profit is the demand is low (ProfitLargeLow).