question archive MJ Logistics has decided to build a new warehouse to support its supply chain activities

MJ Logistics has decided to build a new warehouse to support its supply chain activities

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MJ Logistics has decided to build a new warehouse to support its supply chain activities. They have the

option of building either a large warehouse or a small one. Construction costs are $8 million for the large

facility versus $3 million for the small facility. The profit (excluding construction cost) depends on the volume of work the company expects to contract for in the future.  This is summarized in the  following table (in millions of dollars):

 

                             High Volume.     Low Volume

Large warehouse.     $35                     $20

Small warehouse      $25                     $15

 

The company believes that there is a 60% chance that the volume of demand will be high.

 

a. Construct a decision tree to identify the best choice.

b. Suppose that the company engages an economic expert to provide an opinion about the volume of work based on a forecast of economic conditions. Historically, the expert's upside predictions have been 75% accurate, whereas the downside

predictions have been 90% accurate. In contrast to the company's assessment, the expert believes that the chance for the high demand is 70%. Determine the best strategy if their predictions suggest that the economy will improve or will deteriorate.

Given the information, what is the probability that the volume will be high?

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