ABC industries LTD must decide whether to build a large or small plant to produce a new product which is expected a market life of 10 years. A large plant will cost 28,000,000 to build and put into operation while a small plant will cost only 14,000,000 to build and put into operation.
The company's best estimate of the distribution of sales over the 10 years periods is:
high demand with probability = 0.5
Moderate demand with probability = 0.3
Low demand with probability = 0.2
Cost - volume profit analysis done by ABC industries Ltd management indicates these conditional outcomes under the various combinations of plant size and market size.
a) A large plant with high demand would yield 10,000,000 annually in profits.
b) A large plant with moderate demand would yield 6,000,000 annaully in profits
c) A large plant with low demand would lose 2,000,000 annaully because of productions inefficiencies.
d) A small plant with high demand would yield only 2,500,000 annually in profits considering the cost of