Question

4.
A manufacturer finds the opportunity to increase his business beyond his present or existing production capacity. In order
to decide whether to increase the production capacity, he would need a reliable information about increase in demand of the
product, based on which only, he can commit his resources. He has two choices open to him, firstly, the expansion of the
existing capacity with a cost of Rs. 8 lakhs or the modemisation of the plant at a cost of Rs. 5 lakhs. The time required for
implementation of both the options is expected to be the same. While considering the demand pattern, he estimates the high
demand situation at a probability of 0.35 as compared to the moderate rise in demand at 0.65 probability. He also estimates
that he would be spending an additional amount of Rs
. 12 lakhs for expansion against Rs. 6 lakhs for modernisation
, if the
demand rise is high, whereas in case of moderate demand increase, the expenditure involved would be Rs. 7 lakhs for
expansion or Rs. 5 lakhs for modernisation process.
calculate the conditional profits under various combinations​

Answer 1

Answer:

A manufacturer finds the opportunity to increase his business beyond his present or existing production capacity. In order

to decide whether to increase the production capacity, he would need a reliable information about increase in demand of the

product, based on which only, he can commit his resources. He has two choices open to him, firstly, the expansion of the

existing capacity with a cost of Rs. 8 lakhs or the modemisation of the plant at a cost of Rs. 5 lakhs. The time required for

implementation of both the options is expected to be the same. While considering the demand pattern, he estimates the high

demand situation at a probability of 0.35 as compared to the moderate rise in demand at 0.65 probability. He also estimates