Southern Hospital Supplies, a company that makes hospital gowns, is considering capacity expansion.

APPROACH: c Southern’s major alternatives are to do nothing, build a small plant, build a medium plant, or build a large plant. 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, the alternative that will result in the highest expected monetary value (EMV) can be selected