As operations manager of Holz Furniture, youmust make a decision about adding a line of rustic furniture. Indiscussing the possibilities with your sales manager, Steve Gilbert,you decide that there will definitely be a market and that your firmshould enter that market. However, because rustic furniture has adifferent finish than your standard offering, you decide you need another process line. There is no doubt in your mind about the deci-sion, and you are sure that you should have a second process. But you do question how large to make it. A large process line is going to cost $400,000; a small process line will cost $300,000. The ques-tion, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Tim Ireland of Ireland MarketResearch, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales aslarge as $600,000 and a one-out-of-three chance as low as $300,000.With a large process line, you could handle the high figure of$600,000. However, with a small process line you could not andwould be forced to expand (at a cost of $150,000), after whichtime your profit from sales would be $500,000 rather than the$600,000 because of the lost time in expanding the process. If youdo not expand the small process, your profit from sales would beheld to $400,000. If you build a small process and the demand islow, you can handle all of the demand.Should you open a large or small process line?
As operations manager of Holz Furniture, you
must make a decision about adding a line of rustic furniture. In
discussing the possibilities with your sales manager, Steve Gilbert,
you decide that there will definitely be a market and that your firm
should enter that market. However, because rustic furniture has a
different finish than your standard offering, you decide you need
another process line. There is no doubt in your mind about the deci-
sion, and you are sure that you should have a second process. But
you do question how large to make it. A large process line is going
to cost $400,000; a small process line will cost $300,000. The ques-
tion, therefore, is the demand for rustic furniture. After extensive
discussion with Mr. Gilbert and Tim Ireland of Ireland Market
Research, Inc., you determine that the best estimate you can make is that there is a two-out-of-three chance of profit from sales as
large as $600,000 and a one-out-of-three chance as low as $300,000.
With a large process line, you could handle the high figure of
$600,000. However, with a small process line you could not and
would be forced to expand (at a cost of $150,000), after which
time your profit from sales would be $500,000 rather than the
$600,000 because of the lost time in expanding the process. If you
do not expand the small process, your profit from sales would be
held to $400,000. If you build a small process and the demand is
low, you can handle all of the demand.
Should you open a large or small process line?
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