Thompson Lumber Company is considering expanding into manufacturing backyard storage sheds. They must decide whether to build a large new plant, a small plant, or do nothing. They evaluate the potential profits and losses for each option under favorable and unfavorable market conditions. Thompson will use a decision table to determine the conditional expected values for each alternative based on the probability of different market outcomes to help decide the best option for maximizing profits while minimizing risk.

1. ThompsonLumber Company
A profitable firm located in Portland Oregon
Step 1
 He identifies is whether to expand his product line?
 Manufacturing and marketing a new product , backyardstorage sheds
Step 2
He decides his alternatives
 A larger new plant to manufacture the storage sheds
 A small plant
 No plant at all
Common mistake
o Optimistic decisionmakers ignore bad outcomes.
o Pessimistic mangers may discount a favorable outcome.
Step 3
Any appropriate means of measuring benefit is acceptable (notevery decision
basedon money)
 Market for the storage sheds couldbe favorable(high Demand)
 Unfavorable for the storage sheds (low demand)
Step 4
 Thompson wants to maximize his profit, he canuse Profit to evaluate each
consequence.
With Favorable market
Net profit=$20,000 to his firm
Conditional value = $20,000(building a large factory + having goodmarket)
Unfavorable =180,000 netloss
Small plant
net profit=100,000 in a favorable market.
Loss =20,000 in either market

2. Decision table with conditional Values for Thompson Lumber
State of nature
Favorable Market Unfavorable Market
Alternatives ($) ($)
Constructa large plant 200,000 ~180,000
Constructa small plant 100,000 ~20,000
Do nothing 0 0
 Include all alternatives including do nothing .
Step 5-6
 Select and apply decision theory
 Model=Environment + amount of Risk and Uncertainty involved