Monica Britt has enjoyed sailing small boats since she was 7 years old, when her mother started sailing with her. Today, Monica is considering the possibility of starting a company to produce small sailboats for the recreational market. Unlike other mass-produced sailboats, however, these boats will be made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the sail size will be reduced to prevent problems of capsizing. Her basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, Monica can expect to make R90,000 from the large facility or R60,000 from the smaller facility. If the market is unfavourable, however, Monica estimates that she would lose R30,000 with a large facility and she would lose only R20,000 with the small facility. Because of the expense involved in developing the initial moulds and acquiring the necessary equipment to produce fiberglass sailboats for young children, Monica has decided to conduct a pilot study to make sure that the market for the sailboats will be adequate. She estimates that the pilot study will cost her R10,000. Furthermore, the pilot study can be either favourable or unfavourable. Monica estimates that the probability of a favourable market, given a favourable pilot study, is 0.8. The probability of an unfavourable market, given an unfavourable pilot study, is estimated to be 0.9. Monica feels that there is a 0.65 chance that the pilot study will be favourable. Of course, Monica could bypass the pilot study and simply make the decision as to whether to build a large plant, small plant, or no facility at all. Without doing any testing in a pilot study, she estimates that the probability of a favourable market is 0.6. Using a decision tree and associated calculations which decision is recommended for monica?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 37P

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Monica Britt has enjoyed sailing small boats since she was 7 years old, when her mother started sailing with her. Today, Monica is considering the possibility of starting a company to produce small sailboats for the recreational market. Unlike other mass-produced sailboats, however, these boats will be made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the sail size will be reduced to prevent problems of capsizing. Her basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, Monica can expect to make R90,000 from the large facility or R60,000 from the smaller facility. If the market is unfavourable, however, Monica estimates that she would lose R30,000 with a large facility and she would lose only R20,000 with the small facility. Because of the expense involved in developing the initial moulds and acquiring the necessary equipment to produce fiberglass sailboats for young children, Monica has decided to conduct a pilot study to make sure that the market for the sailboats will be adequate. She estimates that the pilot study will cost her R10,000. Furthermore, the pilot study can be either favourable or unfavourable. Monica estimates that the probability of a favourable market, given a favourable pilot study, is 0.8. The probability of an unfavourable market, given an unfavourable pilot study, is estimated to be 0.9. Monica feels that there is a 0.65 chance that the pilot study will be favourable. Of course, Monica could bypass the pilot study and simply make the decision as to whether to build a large plant, small plant, or no facility at all. Without doing any testing in a pilot study, she estimates that the probability of a favourable market is 0.6. Using a decision tree and associated calculations which decision is recommended for monica?

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