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Question
NARRBEGIN: SA_79_82The Waco Tire Company (WTC) is considering expanding production to meet possible increases in demand. WTC's alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. It will cost them $1 million to build a new facility and $600,000 to expand their existing facility. The market for this particular product may expand, remain stable, or contract. ETC's marketing department estimates the probabilities of these market outcomes as 0.30, 0.45, and 0.25, respectively. The expected revenue for each alternative is presented in the table below.
| MKT expands | MKT stable | MKT contracts | |
| Build new plant | $1,650,000 | $1,000,000 | $450,000 |
| Expand plant | $1,000,000 | $850,000 | $450,000 |
| Do nothing | $0 | $0 | $0 |
What course of action is optimal for WTC? What is the expected profit in that case?
Answer
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