Demand has grown at Dairy May Farms, and it is considering expanding. One option is to expand by purchasing a verylarge farm that will be able to meet expected future demand.Another option is to expand the current facility by a small amountnow and take a wait-and-see attitude, with the possibility of alarger expansion in two years.Management has estimated the following chances for demand:• Th e likelihood of demand being high is 0.70.• Th e likelihood of demand being low is 0.30.Profi ts for each alternative have been estimated as follows:• Large expansion has an estimated profi tability of either$40,000 or $20,000, depending on whether demand turnsout to be high or low.• Small expansion has a profi tability of $15,000, assuming thatdemand is low.• Small expansion with an occurrence of high demand wouldrequire considering whether to expand further. If thecompany expands at that point, the profi tability is expectedto be $35,000. If it does not expand further, the profi tabilityis expected to be $12,000.(a) Draw a decision tree diagram for Dairy May Farms.(b) Solve the decision tree you developed. What should DairyMay Farms do?
large farm that will be able to meet expected future demand.
Another option is to expand the current facility by a small amount
now and take a wait-and-see attitude, with the possibility of a
larger expansion in two years.
Management has estimated the following chances for demand:
• Th e likelihood of demand being high is 0.70.
• Th e likelihood of demand being low is 0.30.
Profi ts for each alternative have been estimated as follows:
• Large expansion has an estimated profi tability of either
$40,000 or $20,000, depending on whether demand turns
out to be high or low.
• Small expansion has a profi tability of $15,000, assuming that
demand is low.
• Small expansion with an occurrence of high demand would
require considering whether to expand further. If the
company expands at that point, the profi tability is expected
to be $35,000. If it does not expand further, the profi tability
is expected to be $12,000.
(a) Draw a decision tree diagram for Dairy May Farms.
(b) Solve the decision tree you developed. What should Dairy
May Farms do?
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