Jody of Jody’s Custom Tailoring is considering expandingher growing business. Th e question is whether to expand with abigger facility than she needs or with a small facility, knowing thatshe will have to reconsider expanding in three years.Jody has estimated the following chances for demand:• Th e likelihood of demand being high is 0.50.• Th e likelihood of demand being low is 0.50. She has also estimated profi ts for each alternative:• Large expansion has an estimated profi tability of either$200,000 or $100,000, depending on whether demand turnsout to be high or low.• Small expansion has a profi tability of $80,000, assuming thatdemand is low.• Small expansion with an occurrence of high demand wouldrequire considering whether to expand further. If thebusiness expands at that point, the profi tability is expectedto be $120,000. If it does not expand further, the profi tabilityis expected to be $70,000.Draw a decision tree and solve it. What should Jody’s CustomTailoring do?
Jody of Jody’s Custom Tailoring is considering expanding
her growing business. Th e question is whether to expand with a
bigger facility than she needs or with a small facility, knowing that
she will have to reconsider expanding in three years.
Jody has estimated the following chances for demand:
• Th e likelihood of demand being high is 0.50.
• Th e likelihood of demand being low is 0.50.
She has also estimated profi ts for each alternative:
• Large expansion has an estimated profi tability of either
$200,000 or $100,000, depending on whether demand turns
out to be high or low.
• Small expansion has a profi tability of $80,000, assuming that
demand is low.
• Small expansion with an occurrence of high demand would
require considering whether to expand further. If the
business expands at that point, the profi tability is expected
to be $120,000. If it does not expand further, the profi tability
is expected to be $70,000.
Draw a decision tree and solve it. What should Jody’s Custom
Tailoring do?
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