Question 4 Jo-Jo Inc is a manufacturing firm that produces soap. The company is owned by two brothers, Donald and David Schroeder, and has one plant. The company has experienced significant growth in demand, and the current plant does not appear to have sufficient capacity to meet demand. The company has decided to build a new plant to meet the additional capacity. However, the brothers must decide whether to construct a small, medium, or large plant. The brothers hired a forecasting consultant to predict demand. The consultant's report indicates that there is a 25 percent chance that the demand will be low and a 75 percent chance that the demand will be high. If Jo-Jo Inc. builds a small facility and the demand indeed turns out to be low, the consultant expects net profit of $40 million. If the firm builds a small plant and the demand turns out to be high, then the firm has two options: (1) subcontract or (2) expand the facility. If Jo-Jo Inc. decides to subcontract, the expected net return will be $44 million. If the firm expands the new facility, there is a 40 percent chance that the net return will be $42 million and a 60 percent chance that the net return will be $48 million. If the medium-size facility is constructed and the demand turns out to be low, the net return is estimated at $28 million. However, if the medium -size facility is built and the demand turns out to be high, Jo-Jo Inc. has two options: (1) do nothing, for an expected net return of $48 million, or (2) expand. If the firm decides to expand, there is a 35 percent chance that it will carn a net return of S44 million and a 65 percent chance that it will earn a net return of $54 million. If the firm decides to build a large facility and demand turns out to be low, the net return will be $10 million. However, if the firm decides to build a large plant and the demand turns out to be high, the expected net return is $58 million. Use decision tree analysis and determine the best option for Jo-Jo Inc.
Question 4 Jo-Jo Inc is a manufacturing firm that produces soap. The company is owned by two brothers, Donald and David Schroeder, and has one plant. The company has experienced significant growth in demand, and the current plant does not appear to have sufficient capacity to meet demand. The company has decided to build a new plant to meet the additional capacity. However, the brothers must decide whether to construct a small, medium, or large plant. The brothers hired a forecasting consultant to predict demand. The consultant's report indicates that there is a 25 percent chance that the demand will be low and a 75 percent chance that the demand will be high. If Jo-Jo Inc. builds a small facility and the demand indeed turns out to be low, the consultant expects net profit of $40 million. If the firm builds a small plant and the demand turns out to be high, then the firm has two options: (1) subcontract or (2) expand the facility. If Jo-Jo Inc. decides to subcontract, the expected net return will be $44 million. If the firm expands the new facility, there is a 40 percent chance that the net return will be $42 million and a 60 percent chance that the net return will be $48 million. If the medium-size facility is constructed and the demand turns out to be low, the net return is estimated at $28 million. However, if the medium -size facility is built and the demand turns out to be high, Jo-Jo Inc. has two options: (1) do nothing, for an expected net return of $48 million, or (2) expand. If the firm decides to expand, there is a 35 percent chance that it will carn a net return of S44 million and a 65 percent chance that it will earn a net return of $54 million. If the firm decides to build a large facility and demand turns out to be low, the net return will be $10 million. However, if the firm decides to build a large plant and the demand turns out to be high, the expected net return is $58 million. Use decision tree analysis and determine the best option for Jo-Jo Inc.
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
Related questions
Question
Transcribed Image Text:Question 4
Jo-Jo Inc is a manufacturing firm that produces soap. The company is owned by two brothers, Donald
and David Schroeder, and has one plant. The company has experienced significant growth in demand,
and the current plant does not appear to have sufficient capacity to meet demand. The company has
decided to build a new plant to meet the additional capacity. However, the brothers must decide whether
to construct a small, medium, or large plant. The brothers hired a forccasting consultant to predict
demand. The consultant's report indicates that there is a 25 percent chance that the demand will be low
and a 75 percent chance that the demand will be high. If Jo-Jo Inc. builds a small facility and the demand
indeed turns out to be low, the consultant expects net profit of $40 million. If the firm builds a small
plant and the demand turns out to be high, then the firm has two options: (1) subcontract or (2) expand
the facility. If Jo-Jo Inc. decides to subcontract, the expected net return will be $44 million. If the firm
expands the new facility, there is a 40 percent chance that the net return will be $42 million and a 60
percent chance that the net return will be $48 million. If the medium-size facility is constructed and the
demand turns out to be low, the net return is estimated at $28 million. However, if the medium -size
facility is built and the demand turns out to be high, Jo-Jo Inc. has two options: (1) do nothing, for an
expected net return of $48 million, or (2) expand. If the firm decides to expand, there is a 35 percent
chance that it will earn a net return of $44 million and a 65 percent chance that it will earn a net return
of $54 million. If the firm decides to build a large facility and demand turns out to be low, the net return
will be $10 million. However, if the firm decides to build a large plant and the demand turns out to be
high, the expected net return is $58 million. Use decision tree analysis and determine the best option
for Jo-Jo Inc.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, management and related others by exploring similar questions and additional content below.Recommended textbooks for you
Understanding Business
Management
ISBN:
9781259929434
Author:
William Nickels
Publisher:
McGraw-Hill Education
Management (14th Edition)
Management
ISBN:
9780134527604
Author:
Stephen P. Robbins, Mary A. Coulter
Publisher:
PEARSON
Spreadsheet Modeling & Decision Analysis: A Pract…
Management
ISBN:
9781305947412
Author:
Cliff Ragsdale
Publisher:
Cengage Learning
Understanding Business
Management
ISBN:
9781259929434
Author:
William Nickels
Publisher:
McGraw-Hill Education
Management (14th Edition)
Management
ISBN:
9780134527604
Author:
Stephen P. Robbins, Mary A. Coulter
Publisher:
PEARSON
Spreadsheet Modeling & Decision Analysis: A Pract…
Management
ISBN:
9781305947412
Author:
Cliff Ragsdale
Publisher:
Cengage Learning
Management Information Systems: Managing The Digi…
Management
ISBN:
9780135191798
Author:
Kenneth C. Laudon, Jane P. Laudon
Publisher:
PEARSON
Business Essentials (12th Edition) (What's New in…
Management
ISBN:
9780134728391
Author:
Ronald J. Ebert, Ricky W. Griffin
Publisher:
PEARSON
Fundamentals of Management (10th Edition)
Management
ISBN:
9780134237473
Author:
Stephen P. Robbins, Mary A. Coulter, David A. De Cenzo
Publisher:
PEARSON