COB 300C - The Operations Dimension

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COB 300C - The Operations Dimension

• Capacity Homework

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• SP1. OHara Software Company is considering
  expanding its networking portion of the business.
  Presently, the company has three networking
  staff members working at corporate headquarters.
  OHara is examining two options. The first would
  involve adding six new staff members and building
  a new facility at the present site. The annual
  cost of this option, including personnel, is
  500,000. The second option involves adding
  twelve new staff members and building a larger
  facility at a new location. The annual cost of
  this option, including personnel, is 1,200,000.
  OHara is looking at the profit potential over
  the next five years. Management estimates that
  the present staff can handle up to 2,000,000 in
  sales over the five-year period, that six
  additional staff positions allow it to handle up
  to 6,000,000, and that twelve additional staff
  positions allow it to handle up to 10,000,000.
  What do you recommend.
• Anticipated Demand Over Five Years Probability
• 2,000,000 .15
• 4,000,000 .25
• 6,000,000 .25
• 8,000,000 .25
• 10,000,000 .10

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Handout Problem 13
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Extra Problem (additional practice)

• A firm that plans to expand its product line must
  decide whether to build a small or a large
  facility to produce the new products. If it
  builds a small facility and demand is low, the
  net present value after deducting for building
  costs will be 400,000. If demand is high, the
  firm can either maintain the small facility or
  expand it. Expansion would have a net present
  value of 450,000, and maintaining the small
  facility would have a net present value of
  50,000.
• If a large facility is built and demand is high,
  the estimated net present value is 800,000. If
  demand turns out to be low, the net present value
  will be negative 10, 000.
• The probability that demand will be high is
  estimated to be .60, and the probability of low
  demand is estimated to be .40.
• Analyze using a tree diagram.

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