COB 300C - The Operations Dimension Capacity Homework

SP1. O’Hara Software Company is considering expanding its networking portion of the business. Presently, the company has three networking staff members working at corporate headquarters. O’Hara 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. O’Hara 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

Handout Problem # 13

Problem # 12 (page 214) 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.