Question: Spencerville Products is growing its operations west of the Mississippi. Its primary step is to build a manufacturing facility in the Denver to please demand on the West Coast. Spencerville consists of an option to build either a large facility which has an annual output of 500,000 units per year or a smaller facility with an output of 250,000 units per year. It should build one of these two facilities - it doesn’t have any other options.
The expected demand for the company's products is shown as either high or moderate in the table shown below:
Demand Level Annual Demand (units/year) Probability
High 450,000 0.4
Moderate 150,000 0.6
The small facility has a profit of $5.00 per unit. The big facility has a profit of $4.00/unit.
a) What size facility must Spencerville Products build based on the expected values and by using a decision tree approach? You should also provide the decision tree by using the suitable decision tree symbols.
b) Assume that the company is not certain regarding the 450,000 projection for the High Demand scenario. It could be more than this projection. How sensitive is the selection in (a) to the High Demand projection. In another words, at what annual demand for High Demand scenario would the company be indifferent among the two size facilities?