Question 1: 10 Points Southern Hospital Supplies Company

Question

Question 1 10 Pointssouthern Hospital Supplies A Company That Make Question #1 (10 points) Southern Hospital Supplies, a company that makes hospital gowns, is considering capacity expansion. The new facility would produce a new type of gown, and currently, the potential or marketability for this product is unknown. If a large plant is built and a favorable market exists, a profit of $100,000 could be realized. An unfavorable market would yield a $90,000 loss. However, a medium plant would earn a $60,000 profit with a favorable market. A $10,000 loss would result from an unfavorable market. A small plant, on the other hand, would return $40,000 with favorable market conditions and lose only $5,000 in an unfavorable market. Of course, there is always the option of doing nothing. Recent market research indicates that there is a .4 probability of a favorable market, which means that there is also a .6 probability of an unfavorable market. With this information, please use the decision tree technique to select the alternative that will result in the highest expected monetary value.

Dr. Jack HW Helper · Accepted Answer

Introduction The decision-making process under uncertainty is a critical aspect of strategic planning for businesses, particularly when evaluating capacity expansion options amid market ambiguity. This paper applies decision tree analysis to determine the optimal capacity choice for Southern Hospital Supplies, considering the potential benefits and risks associated with different plant sizes and the probabilistic nature of market conditions. Understanding the Problem Southern Hospital Supplies is contemplating expanding its operations to produce a new type of hospital gown. The expansion options include building a small, medium, or large plant, each associated with varying costs and expected payoffs depending on market conditions. The market's future state is uncertain, with a 40% chance of being favorable and a 60% chance of unfavorable. The company’s goal is to maximize expected monetary value (EMV) by selecting the most advantageous capacity expansion strategy. Decision Tree Analysis Decision tree analysis facilitates the evaluation of alternative choices under uncertainty by mapping out possible outcomes, associated probabilities, and payoffs. The process begins by outlining the initial decision—selecting the plant size—and then branching into possible market states, each with its probability. The expected payoffs are calculated by multiplying the potential outcomes by their respective probabilities, and the option with the highest EMV is chosen as optimal. Calculations - Large plant: - Favorable market (probability 0.4): profit of $100,000 - Unfavorable market (probability 0.6): loss of $90,000 - EMV = (0.4 $100,000) + (0.6 -$90,000) = $40,000 - $54,000 = -$14,000 - Medium plant: - Favorable market: profit of $60,000 - Unfavorable market: loss of $10,000 - EMV = (0.4 $60,000) + (0.6 -$10,000) = $24,000 - $6,000 = $18,000 - Small plant: - Favorable market: profit of $40,000 - Unfavorable market: loss of $5,000 - EMV = (0.4 $40,000) + (0.6 -$5,000) = $16,000 - $3

Question 1: 10 Points Southern Hospital Supplies Company

Question 1 10 Pointssouthern Hospital Supplies A Company That Make

Paper For Above instruction

Introduction

Understanding the Problem

Decision Tree Analysis

Calculations

Conclusion

References