Question: Rich Sawyer runs a landscaping firm. Each
Rich Sawyer runs a landscaping firm. Each year Rich contracts for labor and equipment hours from a local construction company. The construction company has given Rich three different capacity options: 
Cost per labor hour: ………………………...$10 per hour
Cost per equipment hour: ……..…………$20 per hour
Once Rich has chosen a capacity option, he cannot change it later. In addition, the cost for each capacity option is fixed. That is, Rich must pay for all labor and equipment hours he contracts for, even if he doesn’t need them all. Therefore, there are essentially no variable costs. Rich also has information concerning the amount of revenue and the labor and equipment hours needed for the “typical†landscaping job:
Job revenue ………………...$2,000 per job
Labor hours per job ………..…...30 hours
Equipment hours per job…….. 20 hours
Finally, Rich has identified three possible demand levels. These demand levels, with their associated probabilities, are as follows:
a. (***) Determine the total fixed costs and the break-even point for each capacity option. What is the maximum number of jobs that can be handled under each capacity option?
b. (***) Draw a decision tree for Rich’s firm. What are the nine possible outcomes Rich is facing? (Hint: One is “Rich subcontracts for low capacity and demand turns out to be low.â€) What is the profit (Revenue – fixed costs) associated with each of the nine outcomes? Be sure to consider the capacity limits of each alternative when calculating revenues.
c. (***) Using the information from part b, calculate the expected profit of each capacity alternative. Which option will Rich prefer if he wants to maximize expected profit?
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