Rich Sawyer runs a landscaping firm. Each year Rich contracts for labor and equipment hours from a local construction company. The construction company has given Rich three different capacity options:

Once Rich has chosen a capacity option, he cannot change it later. In addition, the cost for each capacity option is fixed.
That is, Rich must pay for all labor and equipment hours he contracts for, even if he doesn’t need them all. Therefore, there are essentially no variable costs. Rich also has information concerning the amount of revenue and the labor and equipment hours needed for the “typical” landscaping job:

Finally, Rich has identified three possible demand levels.
These demand levels, with their associated probabilities, are as follows:

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CAPACITY OPTION LABOR HOURS EQUIPMENT HOURS High capacity 9000 Medium capacity 6750 Low capacity 4500 6000 4500 3000 Cost per labor hour: $10 per hour Cost per equipment hour: $20 per hour