Question

A computer server manufacturer currently has capacity and demand of 10,000 servers per year. It is considering two options to increase its capacity. The first option is to add 10,000 units of capacity to the plant, this will incur an annualized (need to pay in each period) fixed cost of 10,000,000 plus 500 labor cost per server. The second option is to outsource the production (anything above the capacity) to an independent manufacturer at a cost of 2,000 for each server. The company can sell each server for 15,000 (price of a computer). The company must make the decision for a one-year time horizon (consider period 0 and period 1). During each year, demand for servers has an 80 percent chance of increasing, 50 percent from the year before and a 20 percent chance of remaining the same as the year before. Also the prices may change as well, they have a 50 percent chance of increasing 20 percent in the second year and a 50 percent chance of remaining the same. Assume interest rate = 10% . We would like to use a decision tree to determine whether the company should add capacity to its plant or if it should outsource it to external manufacturer.

2.1 Consider the decision tree for the first option, how many nodes are there in period 0 and period 1?

2.2Consider the decision tree for the first option, from all the nodes in period 1, which node has the highest profit in period 1 ? *

node with demand = 15,000 and price = 18,000, profit = 257,500,000

node with demand = 15,000 and price = 15,000, profit = 257,500,000

node with demand = 10,000 and price = 18,000, profit = 257,500,000

node with demand = 10,000 and price = 15,000, profit = 257,500,000

2.3 Consider the decision tree for the second option, from all the nodes in period 1, which node has the highest profit in period 1 ? *

node with demand = 15,000 and price = 18,000, profit = 260,000,000

node with demand = 15,000 and price = 15,000, profit = 260,000,000

node with demand = 10,000 and price = 18,000, profit = 260,000,000

node with demand = 10,000 and price = 15,000, profit = 260,000,000

2.3Based on a comparison between option 1 and opton 2, which one should be selected? *

Option 1

Option 2

Answer 1

Solution:

Answer for below mentioned points is in the attached image :

Use a decision tree to determine whether Computer server manufacturer should add capacity to its plant or if it should outsource . What are some other factors that we have not discussed that would affect this decision?

with the help of this study i can find that the manufacturer should go for inhouse production.