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Running Head: PART 2 CASE ANALYSIS
PART 2
BELL COMPUTER COMPANY & KYLE BITS AND BYTES CASE STUDY
Student’s Name
The University of Arizona
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PART 2 CASE ANALYSIS
Case 1: Bell Computer Company
Introduction
Bell computer company is desiring a new product and the expected profit will
depend on the demand for the product. At any level of demand, the probability of
achieving a certain amount of annual profit is given. The company is considering a
medium-scale expansion and a large-scale expansion. The company expects higher
annual profit with medium demand in the Medium-scale expansion and higher annual
return with high demand in the Large-scale expansion. The probability estimates for the
low, medium and high demand are 0.20, 0.50, and 0.30, respectively.
The expected value of profit
The expected value of the profit for a medium scale expansion profit is $145,000
while the expected profit for large-scale expansion profits is $140,000. The expected
profits are highly affected by the demand and the probability of achieving an annual
profit. The demand for computers is either low, medium or high. The probability and the
annual profit on a level of demand is the expected profit of expansion profit. For
example, in low demand, the annual profit is zero for large scale profit expansion. For
medium expansion, profit is expected at all levels of demand. The expected value of
profit is given by:
𝑖
∑ 𝑝(𝑥) ∗ 𝐴𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
0
Table 1. Expected profit
Expected Profit ($1000s) Medium-Scale Large-Scale
145
140
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PART 2 CASE ANALYSIS
Decision
Bell computer company will choose an expansion in which the expected profit is
higher. The results indicate that we expect more profit on a medium scale expansion
profit as compared to the large-scale expansion profit. This decision does not consider the
risk that is involved in choosing either of the expansions. Therefore, the Medium scale
expansion profit is the most preferred for maximizing profit.
Variance
Risk analysis of the two-profit maximization investment will also determine
whether Bell Computer Company will consider a plant expansion. We can use variance
and standard deviation to compute the risk of the two expansion strategies. To compute
the variance, we first calculate the deviation of demand to the mean demand (X-u). The
square of the deviation is matched with the probability of achieving the annual profit. The
variance and the standard deviation for Medium-Scale expansion are as follows:
Table 2. Medium-scale expansion
Variance (σ2) 2861.11111
Standard deviation (σ) 53.4893551
The variance and the standard deviation for Medium-Scale expansion are as follows:
Table 3. Large scale expansion
Variance (σ2) 12444.4444
Standard deviation (σ)
111.55467
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PART 2 CASE ANALYSIS
Large scale expansion has a greater variati...