Problem:
Carlisle Tire and Rubber, Inc., is considering expanding production to meet potential increases in the demand for one of its tire products. Carlisle's alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. The market for this particular tire product may expand, remain stable, or contract. Carlisle's marketing department estimates the probabilities of these market outcomes as 0.25, 0.35, and 0.40, respectively. Carlisle's estimated payoff (in dollars) table.
|
|
Market outcome |
|
|
|
Expands |
Stable |
Contracts |
| Decision |
Construct new plant |
$400,000 |
-$100,000 |
-$200,000 |
|
Expand existing plant |
$250,000 |
-$50,000 |
-$75,000 |
|
Do nothing |
$50,000 |
$0 |
-$30,000 |
Use the appropriate Excel computations to identify the strategy that maximizes this tire manufacturer's expected profit. What is the right decision?