Scenario 6.1 - the Big Box

Multiple Choice

Scenario 6.1 - The Big Box
Bahouth Ltd.is planning for the next two years of production and debating whether to construct a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays.The cost to build the large facility is $2 million and the cost to build the small one is $1.2 million.If they construct a large facility and demand is as high as they hope,then operating costs are $450,000 annually.If they construct a large facility and demand is low,then operating costs are $300,000.If they construct a small facility and demand is low,the operating costs are $275,000 but if they experience high demand,the operating cost of a small facility increases to $600,000.After having conducted some market research,they feel that the likelihood of high demand is 0.7 and the likelihood of small demand is 0.3.
-Use the information from Scenario 6.1 to determine the likelihood of high demand that would make the decision maker indifferent between the two alternatives for a two-year operating time.

A) 0.86
B) 0.72
C) 0.28
D) 0.14