A clothing manufacturer must decide whether to spend a considerable sum of money to build a new factory. He knows that if the new factory is built and the clothing business has a good sales year, there will be a $451,000 profit; if the new factory is built and the clothing business has a poor sales year, there will be a deficit of $110,000; if the new factory is not built and the clothing business has a good sales year, there will be a $220,000 profit (mostly because of lower overhead cost). If the clothing manufacturer feels that the probabilities for a good sales year or a poor sales year are, respectively, 0.40 and 0.60, would building the new factory maximize his expected profit?
What type of profit can the manufacturer expect to get if it is a good sales year if he builds? If he doesn't build?
What costs will he have in a good sales year?
Analyze the profits and costs for a poor sales year?
Organize the data into a reasonable table or chain to examine the options. Use this representation to validate your decision.
Does your decision change if the probabilities for a good sales year of a poor sales year are 0.50 and 0.50? What is they are 0.70 and 0.30?