The J. R. Ryland Computer Company is considering a plant expansion to enable the
company to begin production of a new computer product. The company’s president must
determine whether to make the expansion a medium- or large-scale project. Demand for
the new product is uncertain, which for planning purposes may be low demand, medium
demand, or high demand. The probability estimates for demand are 0.25, 0.45, and 0.30,
respectively. Letting and indicate the annual profit in thousands of dollars, the firm’s
planners developed the following profit forecasts for the medium- and large-scale
expansion projects.
Medium-Scale Expansion Profit Large-Scale Expansion Profit
x f(x) y f(y)
Low 50 0.25 0 0.25
Demand Medium 150 0.45 100 0.45
High 200 0.30 300 0.30
a. Compute the expected value for the profit associated with the two expansion
alternatives. Which decision is preferred for the objective of maximizing the expected
profit?
b. Compute the variance for the profit associated with the two expansion alternatives.
Which decision is preferred for the objective of minimizing the risk or uncertainty