Question

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Page 4 of e6 Question 4 (10 marks) You are the owner of a small manufacturer of servers. You sell each server for $15,000. As market for servers has grown dramatically, your plant has reached capacity of 10,000 servers per year. Demand for servers has an 80% chance to increase 50% from the year before and a 20% chance of remaining the same as the year before. The unit cost has a 50% chance of increasing 20% from the year before and 50% chance of remaining the same as the year. Each server costs $8,500. You sell each server for $15,000. You have to make the decision for a two year time horizon. You are considering two options to increase the plant capacity by adding 10,000 or 15,000 units a) Generate a decision (7 marks) b) Use the decision tree to determine whether you should add 10,000 units or 15,000 units (3 marks) SeAe

Answer 1

Decision Tree is as follows

1 Created by Excel oM/QM 74 Problem title Values are on top of nodes. For decision nodes, decision is displayed below the node. Values to the right of final nodes are the cumulative profits along the path Data row 0.5 6 291,250,000 0.8 180,000,000 213,750,000 Demand increase in 2nd 10,000,000 0.5 Price same 7 223,750,000 0.8 158,000,000 Demand increase in first year 97,500,000 Price increase20,00,000 0.2 120,000,000 Demand constant in 2nd 10,000,000 Price same 175,000,000 237,800,000 97,500,000 Santa Clara 0.5 10,000,000 187,500,000 Price increase 0.8 120,000,000 Demand increase in 2nd yr 10,000,000 Price same 1142,500,000 0.2 102,000,000 97,500,000 Demand constant in first year Price increase 2140,000,000 0.2 0,000,000 95,000,000 Demand constant in 2nd 0.5 10,000,000 Price same 110,000,000 227,800,000 65,000,000 0.5 Price increase 55,000,000 0.8 146,250,000 180,000,000 Demand increase in 2nd Price same 5187,500,000 0.8 136,500,000 Demand increase in first year 75,000,000 Price increase 6 195,000,000 0.2 97,500,000 120,000,000 Demand constant in 2nd Price same 7150,000,000 197,400,000 0.5 Price increase 8 170,000,000 0.8 97,500,000 Demand increase in 2nd yr Price same 125,000,000 0.2 91,000,000 75,000,000 Demand constant in first year 50,000,000 0.5 Price increase 0.2 65,000,000 Demand constant in 2nd Price same 100,000,000

Expected profit of option 2 = $ 197,400,000

Expected demand = 33600

First Year Volume	Chance	Second Year Volume	Chance
15000	80%	22500	80%
		15000	20%
10000	20%	15000	80%
		10000	20%

Final expected profit incremental profit of option 2 = 197400000 / 33600 = $ 5875 per server