Question

a farming company has 3 different lands with usability and water allocation limitations

A manufacturing company currently employees 50 workers. It takes a worker an hour to make a unit and workers are paid $20/hour. The material cost is $5/unit. Each worker works 160 hours/week to meet the current monthly demand of 8,000 units. Due to the change of economy, the manufacturing company predicted that the demand has 60% chance of increasing 50% from the previous month and 40% chance of remaining the same for the next three months. The company is considering two options: hiring additional workers at a $1,000 fixed cost (administration and benefit) per month in addition to the hourly labor cost. The company can possibly use subcontracting from a plant China. The cost of subcontracting is 180/unit ($1-6) including material cost. In addition, the exchange rate yuan can go up (the value of yuan increases) by 20% with 80% of change or go down (the value of yuan decreases) by 10% with 20% of chance for the next three months. The yearly discount rate is 12% which means 1% per month. Assume all costs re incurred at the beginning of the period. For example, if the demand for next month is higher, the cost of either hiring additional worker of subcontracting should happen at the current time. A) Please help this company draw the decision tree clearhy B) Which option is better. 27

Answer 1

		Option of hiring workers
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate per month=1%=0.01
		N=Month of Cash Flow
		Variable Cost per month=25*4000	$100,000
		MONTH	0	1	2
	A	Variable Cost	$100,000	$100,000	$100,000
	B	Fixed Cost	$1,000	$1,000	$1,000
	C=A+B	Total Cost	$101,000	$101,000	$101,000	SUM
	PV=C/(1.01^N)	Present Value (PV) of Cash Flow:	$101,000	$100,000	$99,010	$300,010
		Net Present Value of Cost	$300,010
		Option of Subcontracting
			Monthly cost	Probability*Cost
		Probability =0.8	$144,000	$115,200
		Probability =0.2	$108,000	$21,600
		Expected Monthly Cost	$136,800	(115200+21600)
		MONTH	0	1	2
	A	Monthly subcontracting cost	$136,800	$136,800	$136,800	SUM
	PV=A/(1.01^N)	Present Value (PV) of Cash Flow:	$136,800	$135,446	$134,104	$406,350
		Net Present Value of Cost	$406,350
		Option of hiring workers is better
								DECISION TREE Hire Cost $1000 per month plus variable cost $25 per unit Exchang Rate:1Yuan $(1 12000 units p-0 Cost 4000 180 720000 Yuan p 0 Subcontract 8000 units p-0.2 Exchange Rate:1Yuan-$(1 6)*0.9 Cost 4000*180 720000 Yuan p 0.4 8000 units