The J. R. Muchemi Computer Company is considering a plant expansion that
will enable the company to begin production of a new computer product. The
company‟s executive director must determine whether to make the expansion a
medium or large scale project. Uncertainty exists in the demand for the new
product, which for planning purposes may be low, medium or high demand.
The probability estimates for demand are 0.20, 0.50 and 0.30 respectively. The
firm‟s accountants have developed the following annual profit (in thousands of
shillings) forecasts for the medium and large scale expansion projects:
Medium scale
expansion
Large scale expansion
Profit Probability Profit Probability
Low 50 0.20 0 0.20

Demand Medium 150 0.50 100 0.50
High 200 0.30 300 0.30
Required:
(i) Which decision is preferred for the objective of maximizing the expected
profit? (4 marks)
(ii) Which decision is preferred for the objective of minimizing the risk or
uncertainty? (4 marks)
(iii) From your answers in (i) and (ii) above, should the company go for
medium scale expansion or the large scale expansion? Explain.
(2 marks)