Then, calculate the expected value for each decision branch. Which option would you prefer and why?

Bozarth, C. C., & Handfield, R. B. (2019). Introduction to operations and supply chain management (5th ed.). Pearson.

Prior to beginning work on this discussion forum, read Chapter 3: Process Choice and Layout Decisions in Manufacturing and Services, and Chapter 6: Managing Capacity, paying close attention to Sections 6.1, 6.2, and 6.3, reviewing the concepts of capacity, three common capacity strategies, methods of evaluating capacity alternatives, and decision trees.

Example 6.3 will provide you with two examples of decision trees (Figures 6.4 and 6.5). Next, at the end of Chapter 6, consider the two capacity options for Arktec manufacturing from Problem 2 and the three possible demand scenarios from Problem 4. First, draw the decision tree for Arktec Manufacturing. When drawing your tree, assume that managers must select a capacity option before they know what the demand level will actually be. Then, calculate the expected value for each decision branch. Which option would you prefer and why?

SAMPLE SOLUTION

Capacity is provided by $ 100,000 (fixed cost) + $ 10 (variable cost) (Kingsford & Salzberg, 2008)
The total cost is given as 100,000 + 10(x)
For low, the capacity will be given as 100,000 + 10(25,000) = 350,000
For media, the capacity is given as 100,000 + 10(60,000) = 700,000
For high, the capacity is given as 100,000 + 10(100,000) = 1,100,000
EV is given as (350,00030%) + (700,00040%) + (1,100,000*30%) = 715,000
Option 2
Capacity is given as $ 500,000(fixed cost) + $ 2 (variable cost) (Rokach & Maimon, 2005).
The total cost is given as 500,000 + 2 (y)
For the lowest 500,000+2(25,000) = 550,000
For the medium 500,000 + 2(60,000) = 620,000
For the high 500,000 + 2(100,000) = 700,000…