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 the 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 decision, and you ar e 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 question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Time Ireland of Ireland Market Research, Inc., you determine that the best estimate you can make is that there is two-out –of – three chance of profit form 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 have 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 $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 form 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?
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 the 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 decision, and you ar e 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 question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Time Ireland of Ireland
With a large process line, you could have 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 $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 form 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?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
