As operations manager of Holz? Furniture, you must make a decision about adding a line of rustic furniture. In discussing the possibilities with your sales? manager, Steve? Gilbert, you decide that there will definitely be a market and that your firm should enter that market.? However, because rustic furniture has a different finish than your standard? offering, you decide you need another process line. There is no doubt in your mind about the? decision, and you are sure that you should have a second process. But you do question how large to make it. A large process line is going to cost $ 400,000?; a small process line will cost $ 300,000. The? question, therefore, is the demand for rustic furniture. After extensive discussion with Mr. Gilbert and Tim Ireland of Ireland Market? Research, Inc., you determine that the best estimate you can make is that there is a? two-out-of-three chance of high demand resulting in $ 650,000 profit from sales and a? one-out-of-three chance of low demand resulting in $ 325,000 profit from sales. With a large process? line, you could handle the high figure of $ 650,000. ?However, with a small process line you could not and would be forced to expand? (at a cost of $ 125,000?), after which time your profit from sales would be $ 550,000 rather than the $ 650,000 because of the lost time in expanding the process. If you do not expand the small? process, your profit from sales would be held to $ 450 comma 000. If you build a small process and the demand is? low, you can handle all of the demand.
The best option is to open a (large or small line) with an expected value of ??