For the DoorCo Corporation decision in Problem, compute the standard deviation o
ID: 3173866 • Letter: F
Question
For the DoorCo Corporation decision in Problem, compute the standard deviation of the payoffs for each decision. What does this tell you about the risk in making the decision? Problem The DoorCo Corporation is a leading manufacturer of garage doors. All doors are manufactured in their plant in Carmel, Indiana, and shipped to distribution centers or major customers. DoorCo recently acquired another manufacturer of garage doors, Wisconsin Door, and is considering moving its wood-door operations to the Wisconsin plant. Key considerations in this decision are the transportation, labor, and production costs at the two plants. Complicating matters is the fact that marketing is predicting a decline in the demand for wood doors. The company developed three scenarios: 1. Demand falls slightly, with no noticeable effect on production. 2. Demand and production decline 20%. 3. Demand and production decline 40%. The following table shows the total costs under each decision and scenario. What decision should DoorCo make using each strategy? a. aggressive strategy b. conservative strategy c. opportunity-loss strategyExplanation / Answer
a. by taking decision through agressive strategy is the strategy to maximize its return or minimize its cost by taking highest risk.
by this strategy, company should move to the wisconsin plant because of the following reasons despite having the risk:
(1) Moving to wisconsin may cost more then staying in Carnel if demand of wodden doors slightly fall but in the long term it will benifit the company as all garage doors can be made ar carmel and other at wisconsin.
(2) If demand falls it will automatically benifit the company as the total cost is less then the cost is in wisconsin.
b. Conservative strategy : by following conservative strategy , company should stick to its production to the wisconsin plant because it will save a huge amount of 0.2mn dollars in cost if demands falls only slightly and the current plant can put it in the best available resources like wood, labour and capital and minimizing the transportation cost.
c. Opportunity loss strategy :
In this strategy we will discuss the hidden cost for opting any option
1. if demand falls slightly moving to wisconsin will cost more to stay in carmel= $ 0.2 Mn
2. if demand falls 20% , moving to wisconsin will cost more to stay in carmel= $ 0.015 Mn
3. if demand falls 40% , moving to wisconsin will cost more to stay in carmel = - % 0.04 Mn
so until and unless the probability of demand falling more than 80% , then comapny should stick to its production plant in Carmen. If there is very high probability that demand will fall more than 40% then it should moe to wisconsin.