Question
Spectrum Hair Salon is considering expanding its business, as it is experiencing a large growth. The question is whether it should expand with a bigger
Spectrum Hair Salon is considering expanding its business, as it is experiencing a large growth. The question is whether it should expand with a bigger facility than needed, hoping that demand will catch up, or with a small facility, knowing that it will need to reconsider expanding in three years. The management at Spectrum has estimated the following chances for demand:
the likelihood of demand being high is 0.70; | |
the likelihood of demand being low is 0.30. |
Estimated profits for each alternative are as follows:
large expansion has an estimated profitability of either $102,000 or $70,000, depending on whether demand turns out to be high or low; | |
small expansion has a profitability of $52,000, assuming that demand is low; | |
small expansion with an occurrence of high demand would require considering whether to expand further. If the business expands at this point, the profitability is expected to be $93,000. If it does not expand further, the profitability is expected to be $60,000. |
Solve the decision tree.
EVsmall expansion = $enter expected value for small expansions in dollars ,
EVlarge expansion = $enter expected value for large expansions in dollars
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