Question: MJ Logistics has decided to build a new warehouse to support its supply chain activities. They have the option of building either a large warehouse

MJ Logistics has decided to build a new warehouse to support its supply chain activities. They have the option of building either a large warehouse or a small one. Construction costs for the large facility are $ 8 million versus $ 3 million for the small facility. The profit ( excluding construction cost) depends on the volume of work the company expects to contract for in the future. This is summarized in the following table ( in millions of dollars):

The company believes that there is a 60% chance that the volume of demand will be high. a. Construct a decision tree to identify the best choice.

b. Suppose that the company engages an economic expert to provide an opinion about the volume of work based on a forecast of economic conditions. Historically, the expert’s upside predictions has been 75% accurate, whereas the downside predictions have been 90% accurate. In contrast to the company’s assessment, the expert believes that the chance for high demand is 70%. Determine the best strategy if their predictions suggest that the economy will improve or will deteriorate. Given the information, what is the probability that the volume will be high?

Large warehouse Small warehouse High Volume $35 $25 Low Volume $20 $15