Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard. Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine, and the Riesling grapes would be used to produce a semidry Riesling wine. It takes approximately four years from the time of planting before new grapes can be harvested. This length of time creates a great deal af uncertainty concerning future demand and makes the decision concerning the type of grapes to plant difficult. Three possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and both Chardonnay and Riesling grapes. Seneca management decided that for planning purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine it was necessary to assess four probabilities. With the help of some forecasts in industry publications management made the following probability assessments. demand is strong for Riesling grapes. If Seneca plants both types of grapes, the annual profit projections are as shown in the following table. (a) What is the decision to be made, what is the chance event, and what is the consequence? The decision to be made is . The chance event is . The consequence is Identify the altematives for the decisions and the possible outcomes for the chance events. The alternatives for the decisions are . The possible outcomes for the chance events are (c) Use the expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit. EV(Plant Chardonnay) EV(Plant both grapes) EV(Plant Riesling) The best decision is to plant grapes. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50. EV(Plant Chardonnay) EV(Plant both grapes) EV(Plant Riesling) Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard. Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine, and the Riesling grapes would be used to produce a semidry Riesling wine. It takes approximately four years from the time of planting before new grapes can be harvested. This length of time creates a great deal af uncertainty concerning future demand and makes the decision concerning the type of grapes to plant difficult. Three possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and both Chardonnay and Riesling grapes. Seneca management decided that for planning purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine it was necessary to assess four probabilities. With the help of some forecasts in industry publications management made the following probability assessments. demand is strong for Riesling grapes. If Seneca plants both types of grapes, the annual profit projections are as shown in the following table. (a) What is the decision to be made, what is the chance event, and what is the consequence? The decision to be made is . The chance event is . The consequence is Identify the altematives for the decisions and the possible outcomes for the chance events. The alternatives for the decisions are . The possible outcomes for the chance events are (c) Use the expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit. EV(Plant Chardonnay) EV(Plant both grapes) EV(Plant Riesling) The best decision is to plant grapes. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50. EV(Plant Chardonnay) EV(Plant both grapes) EV(Plant Riesling)
