Discussion:
A manufacturer of designer jeans must decide whether to build a large factory or a small factory in a particular location. The profit per pair of jeans manufactured is estimated as $10. A small factory will incur an annual cost of $200,000, with a production capacity of 50,000 pairs of jeans per year. A large factory will incur an annual cost of $400,000, with a production capacity of 100,000 pairs of jeans per year. Four levels of manufacturing demand are considered likely: 10,000, 20,000, 50,000, and 100,000 pairsof jeans per year.
a. Determine the payoffs for the possible levels of production for a small factory.
b. Determine the payoffs for the possible levels of production for a large factory.
c. Based on the results of (a) and (b), construct a payoff table, indicating the events and alternative courses of
action.
d. Construct a decision tree.
e. Construct an opportunity loss table. parts (a), (b), and (c).