1. John Thompson is the founder and president of Thompson L

1. John Thompson is the founder and president of Thompson Lumber… 1. John Thompson is the founder and president of Thompson Lumber Company, a profitable company located in Toronto ON. John Thompson wants to expand his product line by manufacturing and marketing a new product, backyard storage sheds. To do that he considers two projects. Construct: a. a large new plant to manufacture the storage sheds, b. a small plant, or c. no plant at all (i.e., he has the option of not developing the new product line). Thompson determines that there are only two possible outcomes: the market for the storage sheds could be favorable, meaning that there is a high demand for the product, or it could be unfavorable, meaning that there is a low demand for the sheds. Because Thompson wants to maximize his profits, he can use profit to evaluate each consequence. John Thompson has already evaluated the potential profits associated with the various outcomes. With a favorable market, he thinks a large facility would result in a net profit of $200,000 to his firm. This $200,000 is a conditional value because Thompson’s receiving the money is conditional upon both his building a large factory and having a good market. The conditional value if the market is unfavorable would be an $180,000 net loss. A small plant would result in a net profit of $100,000 in a favorable market, but a net loss of $20,000 would occur if the market was unfavorable. Finally, doing nothing would result in $0 profit in either market. Suppose that John Thompson believes that the probability of a favorable market is exactly the same as the probability of an unfavorable market; that is, each state of nature has a 0.50 probability.  (a) Develop a decision tree of this problem. (b) What is the best solution? ( Which alternative would give the greatest expected monetary value? )   2. Coren Chemical, Inc., develops industrial chemicals that are used by other manufacturers to produce photographic chemicals, preservatives, and lubricants. One of their products, K-1000, is used by several photographic companies to make a chemical that is used in the film-developing process. To produce K-1000 efficiently, Coren Chemical uses the batch approach, in which a certain number of gallons is produced at one time. This reduces setup costs and allows Coren Chemical to produce K-1000 at a competitive price. Unfortunately, K-1000 has a very short shelf life of about one month. Coren Chemical produces K-1000 in batches of: • 500 gallons, • 1,000 gallons, • 1,500 gallons, • and 2,000 gallons. Using historical data, David Coren was able to determine that the probability of selling 500 gallons of K-1000 is 0.2. The probabilities of selling 1,000, 1,500, and 2,000 gallons are 0.3, 0.4, and 0.1, respectively. The question facing David is how many gallons to produce of K-1000 in the next batch run. K-1000 sells for $20 per gallon. Manufacturing cost is $12 per gallon, and handling costs and warehousing costs are estimated to be $1 per gallon. In the past, David has allocated advertising costs to K- 1000 at $3 per gallon. If K-1000 is not sold after the batch run, the chemical loses much of its important properties as a developer. It can, however, be sold at a salvage value of $13 per gallon. Furthermore, David has guaranteed to his suppliers that there will always be an adequate supply of K-1000. If David does run out, he has agreed to purchase a comparable chemical from a competitor at $25 per gallon. David sells all of the chemical at $20 per gallon, so his shortage means that David loses the $5 to buy the more expensive chemical.  (c) Develop a decision tree of this problem. (d) What is the best solution? Business Management Human Resource Management PROJECT M 1004

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