Answered Essay: Ne Steiner-Wallace Corporation has determined that it needs to expand in order to accommodate

ne Steiner-Wallace Corporation has determined that it needs to expand in order to accommodate grovw ing demand for its laptop computers and tablets. The decision has come down to either expanding now with a large facility, incurring additional costs and taking the risk that the demand will not materialize, or ex- panding small, knowing that in three years manage- ment will need to reconsider the question. Management has estimated the following chances for demand: The likelihood of demand being high is 0.60. The likelihood of demand being low is 0.40. Profits for each alternative have been estimated as follows: Large expansion has an estimated profitability of either $100,000 or $60,000, depending on whether demand turns out to be high or low . Small expansion has a profitability of $50,000, 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 profitability is expected to be $70,000. If it does not expand further, the profitability is expected to be $45,000 (a) Draw a decision tree showing the decisions, chance events, and their probabilities, as well as the profitability of outcomes (b) Solve the decision tree and decide what Steiner- Wallace should do.

Ne Steiner-Wallace Corporation has determined that it needs to expand in order to accommodate grovw ing demand for its laptop computers and tablets. The decision has come down to either expanding now with a large facility, incurring additional costs and taking the risk that the demand will not materialize, or ex- panding small, knowing that in three years manage- ment will need to reconsider the question. Management has estimated the following chances for demand: The likelihood of demand being high is 0.60. The likelihood of demand being low is 0.40. Profits for each alternative have been estimated as follows: Large expansion has an estimated profitability of either $100,000 or $60,000, depending on whether demand turns out to be high or low . Small expansion has a profitability of $50,000, 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 profitability is expected to be $70,000. If it does not expand further, the profitability is expected to be $45,000 (a) Draw a decision tree showing the decisions, chance events, and their probabilities, as well as the profitability of outcomes (b) Solve the decision tree and decide what Steiner- Wallace should do.

Expert Answer

Answer

Steiner-wallace corporation

left | right |

expansion plans(review and changes after 3 years a possibility)

left | right |

Go Big Go Small

0.6-High demand 0.4 Low demand 0.6 high demand 0.4 low demand

profitability profitability profitability profitability

$100,000 $60,000 with out expansion with exp $50,000

$45,000 $70,000

Considering the above scenario the path that Steiner-Wallace corporation should take the path of expanding big and assuming that it will have high demand the profitability is $40,000 compared to low demand after expansion as well as$50,000 loss compared to going small.

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