Question
You currently manufacture imitation Beany Babies. The manufacturing capacity is at 100,000, and the cost is $3 each. There is a 40% probability that demand
You currently manufacture imitation Beany Babies. The manufacturing capacity is at 100,000, and the cost is $3 each. There is a 40% probability that demand will be high, with demand for 250,000 units at a price of $5 each. Otherwise, demand will be low, with maximum sales at 60,000 units at a price of $4 each. You have the option of spending $100,000 to increase production capacity to 300,000 units. Should you increase capacity? How much would you pay for a perfectly accurate forecast of demand? For an 80% accurate forecast? Illustrate your answer using a decision tree.
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