James Lawson's Bed and Breakfast, in a small historic Mississippi town, must decide how to subdivide (remodel) the large old home that will become its inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. Option B would modernize only the second floor; the results would be six suites, four for two to four adults, two for two adults only. Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. Below are the details of profit and demand patterns that will accompany each option:
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Annual profit under various demand patterns
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Alternatives
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High
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P
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Average
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P
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A (modernize all)
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$90,000
|
.5
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$25,000
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.5
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B (modernize 2nd)
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$80,000
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.4
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$70,000
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.6
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|
C (status quo)
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$60,000
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.3
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$55,000
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.7
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Which option has the highest expected monetary value?