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Homemakers Ltd. specializes in producing houses. Management observed that when the weather conditions are good,...

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Accounting

Homemakers Ltd. specializes in producing houses. Management observed that when the weather conditions are good, the pace at which the houses are built increases since more building work is able to take place. The operators are now trying to work out the level of home production for the coming year in order to maximize profits.

Homemakers Ltd. does not want to miss out on the opportunity to earn large profits by not being able to satisfy demand. However, it doesn't want to be left with large quantities of unsold houses at the end of the year. Management has decided to produce at one of the three levels of production to match forecast demand.

Supply (number of houses)

Weather

Probability

175,000

140,000

100,000

Demand

Good

0.20

$875,000

$700,000

$500,000

Average

0.50

$542,500

$700,000

$500,000

Poor

0.30

$162,500

$320,000

$500,000

Required:

a) What is the level of production based on the maximin, maximax and the minimax regret decision rule? (7 marks)

b) Prepare an expected values table and identify the level of production based on expected values. (6 marks)

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