Question

A feed manufacturing company is faced with a capacity decision.  Their present production facility is running at nearly maximum capacity.  Management is considering the following three decision alternatives:

1. No expansion
2. Add on the present facility
3. Build a new facility

What option would be recommended under the optimistic approach?

What option would be recommended under the conservative approach?

What option would be recommended under the opportunity (minimax) regret approach?

PLEASE EXPLAIN WHAT THESE TERMS MEAN WHEN SOLVING THE QUESTION

	State of demand
Option:	Less	No change	Moderate increase	Large increase
No expansion	-$20	$0	$10	$15
Add on	-$50	-$10	$20	$35
Build a new facility	-$150	-$80	-$5	$55

Answer 1

a. Option under optimistic approach: Optimistic approach considers the option that gives maximum profit, under , , best possible condition. With best possible outcome, i.e. Large increase in demand, maximum profit of $55 is coming through option 'Build a new facility', and hence this is the suitable option for manufacturing company.

Option under conservative approach: Conservative approach considers the best possible result in the worst case scenario. Here, the worst case scenario is less of demand. With decrease in demand, option 'No expansion' is the best one with less loss of $20 and hence is the suitable option for manufacturing company.

Option under opportunity regret approach: Opportunity approach focus on minimizing the regret by the unexpected loss.This approach considers opportunity loss and tries to minimize the opportunity loss. When a decision is based on assuming certain outcome but the actual outcome is less than the expected one, then this approach consider the option that minimizes the risk. In the example given, suppose company makes the decision considering large increase in demand but on reality if the demand is not large and it is moderate then option 'Add on' is the best possible outcome with profit of $20 and hence is the right option for the manufacturing company.