In order to be able to meet an anticipated increase in demand for a basic industrial material a business is considering ways of developing the manufacturing process. After meeting current operating costs the business expects to make a net profit of £16 000 from its existing process when running at full capacity. All the data relates to the same period.
The Production Manager has listed the following possible courses of action.
a. Continue to operate the existing plant and not expand to meet the new level of demand.
b. Undertake a research programme which would cost £20 000 and has been given a 0.8 chance of success. If successful, a net profit of £60 000 is expected (before charging the research cost). If not successful a net profit of £5000 is expected.
c. Undertake a less expensive research programme costing £8000 which has been given a 0.5 chance of success. If successful, a net profit of £5000 is expected and if not successful a net profit of £4000 is expected.
Present a decision tree. On the basis of this analysis determine the most profitable course of action. Comment on your findings.