Rowdy Ranger, Inc. is thinking about opening a new facility to deal with growing demand for his electric nose hair trimmer. The company must decide whether to construct a large, medium, or small facility. The firm’s operations manager has performed a forecasting analysis and estimates there is a 25% chance that demand will slow and a 75% chance that demand will continue to grow.
If Rowdy builds a large facility and demand slows, net profits of $10 million are expected. If demand continues to grow, net profit is expected to be $56 million.
If Rowdy builds a medium-sized facility and demand slows, the net profit is estimated at $28 million. However, if demand continues to grow, Rowdy could either do nothing - for an expected net profit of $48 - or expand. If they decide to expand, there is a 30% chance of realizing a net profit of $44 million and a 70% chance of realizing a net profit of $54 million.
If Rowdy builds a small facility and demand slows, net profits of $40 million are expected. If demand continues to grow, Rowdy could choose to outsource the extra work or expand the facility. If outsourcing is used, the net profit would be $44 million. If expansion is chosen, there is a 35% chance of realizing a net profit of $42 and a 65% chance of realizing net profit of $48.
a. Draw and solve a decision tree for this problem
b. Write your recommendation.