Problem 13-13 (Algorithmic) Seneca Hill Winery recentlypurchased land for the purpose of establishing a new vineyard.Management is considering two varieties of white grapes for the newvineyard: Chardonnay and Riesling. The Chardonnay grapes would beused to produce a dry Chardonnay wine, and the Riesling grapeswould be used to produce a semidry Riesling wine. It takesapproximately four years from the time of planting before newgrapes can be harvested. This length of time creates a great dealof uncertainty concerning future demand and makes the decisionabout the type of grapes to plant difficult. Three possibilitiesare being considered: Chardonnay grapes only; Riesling grapes only;and both Chardonnay and Riesling grapes. Seneca management decidedthat for planning purposes it would be adequate to consider onlytwo demand possibilities for each type of wine: strong or weak.With two possibilities for each type of wine, it was necessary toassess four probabilities. With the help of some forecasts inindustry publications, management made the following probabilityassessments:
Chardonnay Demand Riesling Demand Weak Strong Weak 0.05 0.50Strong 0.20 0.25
Revenue projections show an annual contribution to profit of$20,000 if Seneca Hill only plants Chardonnay grapes and demand isweak for Chardonnay wine, and $80,000 if Seneca only plantsChardonnay grapes and demand is strong for Chardonnay wine. IfSeneca only plants Riesling grapes, the annual profit projection is$20,000 if demand is weak for Riesling grapes and $40,000 if demandis strong for Riesling grapes. If Seneca plants both types ofgrapes, the annual profit projections are shown in the followingtable:
Chardonnay Demand Riesling Demand Weak Strong Weak $24,000$35,000 Strong $28,000 $65,000
A.What is the decision to be made, what is the chance event, andwhat is the consequence? Identify the alternatives for thedecisions and the possible outcomes for the chance events.
b.Choose the correct decision tree.
c. Use the expected value approach to recommend whichalternative Seneca Hill Winery should follow in order to maximizeexpected annual profit.
d.
