Tom Knupp, the owner and manager of Knupp Winery, has seen the company grow sign
ID: 456536 • Letter: T
Question
Tom Knupp, the owner and manager of Knupp Winery, has seen the company grow significantly in the last several years. Demand for the product has continued to be strong, and the present facilities are not sufficient to keep pace with the projected growth. A recent market survey indicates that demand for the product will increase 20 percent next year, with a 0.3 probability. If it does not grow by 20 percent the first year, then the market is projected to grow at 10 and 2 percent with a 0.4 and a 0.3 probability, respectively. Knupp could expand the facility this year by building a large addition or a small addition to capacity. If he chooses to make a large increase now, the combined first- and second- year profit growth potential would be as follows: High Sales Moderate Sales Low Sales $120,000 $10,000 $–80,000 If Knupp decides to expand with a small addition, the company would have the following increase in profit potential for the next two years: High Sales Moderate Sales Low Sales $40,000 $20,000 $–15,000 A simplified description of the process for making vine follows. The grapes are cleaned and prepared for the press operation, which squeezes the juice from the grapes. The juice is strained to remove impurities and placed into large vats to ferment. After the appropriate time for aging has passed, the wine is bottled and shipped to distributors. 1. Analyze the alternatives for expanding Knupp Winery. (Use a decision tree or table.) 2. Before Knupp makes a final decision to expand, he should consider other possibilities. What are some other ways to increase capacity? How might these be used? 3. Make a recommendation to Knupp, and support it.
Explanation / Answer
2. Other possibilities to increase capacity can be outsourcing the additional demand to a set of low cost trustworthy suppliers. Knupp Winery can identify parts of the process, or the complate process to outsource in case need of more capacity arises. in the process described, Knupp can outsource the vine making process to a supplier, by providing his own grapes or by allowing him to outsource the raw material from sleected suppliers.
Also, Knupp can rent machinery like the pressing equipment, and/or place like the place needed to store the aging vine, for high capacity durations.
3. Knupp should go for large addition of the capacity, as the total EMV (Expected Monetary Value), from the large capacity addition is higher than the small capacity addition. Hence, I would suggest Knupp to go for large capacity addition, to cater to the expected demand growth.
demand increase 20% first year 0.3 10% market growth 0.4 2 % market growth 0.3 Higher market growth implues higher sales, hence the given probabilities can be considered for high sales, moderate sales and low sales) High Sales Moderate Sales Low Sales EMV large addition $ 1,20,000 $ 10,000 $ -80,000 $ 16,000 small addition $ 40,000 $ 20,000 $ -15,000 $ 15,500 Probabilities 0.3 0.4 0.3 (EMV (large addition) = 120,000*0.3+10,000*0.4-80,000*0.3) (EMV (small addition) = 40,000*0.3+20,000*0.4-15,000*0.3)