A manufacturing company is faced with a capacity decision. Its present production facility is running at nearly maximum capacity. Management is considering the following three capacity decision alternatives. 1. No expansion 2. Add on to the present facility 3. Build a new facility The managers believe that if a large increase occurs in demand for their product in the near future, they will need to build a new facility to compete and capitalize on more efficient technological and design advances. However, if demand does not increase, it might be more profitable to maintain the present facility and add no capacity. A third decision alternative is to add on to the present facility, which will suffice for a moderate increase in demand and will be cheaper than building an entirely new facility. A drawback of adding to the old facility is that if there is a large demand for the product, the company will be unable to capitalize on new technologies and efficiencies, which cannot be built into the old plant. The following decision table shows the payoffs (in $ millions) for these three decision alternatives for four different possible states of demand for the companys product (less demand, same demand, moderate increase in demand, and large increase in demand). Use these data to determine which decision alternative would be selected by the maximax criterion and the maximin criterion. Use ?ñ = 4 and the Hurwicz criterion to determine the decision alternative. Calculate an opportunity loss table and determine the decision alternative by using the minimax regret criterion. State of Demand Moderate Large Less No Change Increase Increase No Expansion ??$ $ $ $ Capacity Decision Add On ??$40 ??$28 $10 $20 Build a New Facility ??$210 ??$145 ??$ $55
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