Scenario 6.1 - The Big Box
Bahouth Ltd.is planning for the next two years of production and debating whether to construct a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays.The cost to build the large facility is $2 million and the cost to build the small one is $1.2 million.If they construct a large facility and demand is as high as they hope,then operating costs are $450,000 annually.If they construct a large facility and demand is low,then operating costs are $300,000.If they construct a small facility and demand is low,the operating costs are $275,000 but if they experience high demand,the operating cost of a small facility increases to $600,000.After having conducted some market research,they feel that the likelihood of high demand is 0.7 and the likelihood of small demand is 0.3.
-Suppose the contractor has found some materials on Craigslist that can drop the construction cost of a large facility to $1,500,000.These materials cannot be used in the construction of the small facility,so its price remains as indicated in Scenario 6.1.Determine the likelihood of high demand that would make the decision maker indifferent between the two alternatives for a two-year time period.

Question

Quizplus · Accepted Answer

The Answer of Scenario 6.1 - The Big Box
Bahouth Ltd.is planning for the next two years of production and debating whether to construct a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays.The cost to build the large facility is $2 million and the cost to build the small one is $1.2 million.If they construct a large facility and demand is as high as they hope,then operating costs are $450,000 annually.If they construct a large facility and demand is low,then operating costs are $300,000.If they construct a small facility and demand is low,the operating costs are $275,000 but if they experience high demand,the operating cost of a small facility increases to $600,000.After having conducted some market research,they feel that the likelihood of high demand is 0.7 and the likelihood of small demand is 0.3.
-Suppose the contractor has found some materials on Craigslist that can drop the construction cost of a large facility to $1,500,000.These materials cannot be used in the construction of the small facility,so its price remains as indicated in Scenario 6.1.Determine the likelihood of high demand that would make the decision maker indifferent between the two alternatives for a two-year time period.

Scenario 6.1 - the Big Box