4. Demand for your companies\' product is growing and has now outpaced their pro

Question

4. Demand for your companies' product is growing and has now outpaced their production capacity. With further growth in demand anticipated for next year, the company must find some way to expand capacity or risk losing customers when demand cannot be met. Your boss came to you and announced that three options were being considered: to expand the existing plant, to build a whole new plant from the ground up, or simply to subcontract with another company based on the following data in tree diagram. What decision would you suggest? High (.4) Mod (.4) low..2) -100 High (.4) Mod (.4) Low (.2) High (.4) Mod (.4) Low 1.2)- .50 1200 Expand 500 2500 1200 500 1500 Build Subcont 800

Explanation / Answer

Expected outcoem if existing plant is expanded = 0.4x1200 + 0.4x500+ 0.2x-100 = 660

Expected outcome if new plant is built = 0.4x2500 + 0.4x1200 + 0.2x-500 = 1380

Expected outcome if subcontracted = 0.4x1500 + 0.4x800 +0.2x-50 = 910

So, the best option is to build a new plant

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