Question

The Bell Computer Company is considering a plant expansion enabling the company to begin production of a new computer product. You have obtained your MBA from the University of Phoenix and, as a vice-president, you must determine whether to make the expansion a medium- or large- scale project. The demand for the new product involves an uncertainty, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for the demands are 0.20, 0.50, and 0.30, respectively.

Case 1: Bell Computer Company

• Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit?
• Compute the variation for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?

		Medium-Scale		Large-Scale
		Expansion Profits		Expansion Profits
		Annual Profit ($1000s)	P(x)	Annual Profit ($1000s)	P(x)
Demand	Low	50	20%	0	20%
	Medium	150	50%	100	50%
	High	200	30%	300	30%
Expected Profit ($1000s)
Risk Analysis for Medium-Scale Expansion
Demand	Annual Profit (x) $1000s	Probability P(x)	(x - µ)	(x - µ)2	(x - µ)2 * P(x)
Low	50	20%
Medium	150	50%
High	200	30%
				σ2 =
				σ =
Risk Analysis for Large-Scale Expansion
Demand	Annual Profit (x) $1000s	Probability P(x)	(x - µ)	(x - µ)2	(x - µ)2 * P(x)
Low	0	20%
Medium	100	50%
High	300	30%
				σ2 =
				σ =

Answer 1