Arthrodax Company has been approached by Ranger Sound with a
rush order offer to purchase 100 units of a customized version of
Arthrodax's SoundScreamer audio mixer at $5,000 per unit, and
Arthrodax needs to decide how to respond.
• The electronic modifications of the standard SoundScreamer
needed for this customized version are straightforward, but there
will be a fixed cost of $100,000 to design the modifications and
set up for assembly of the customized SoundScreamers, regardless of
the number of units produced.
• It will cost $2,000 per unit to manufacture the circuit
boards for the units. Since Arthrodax has some short-term spare
manufacturing capacity, the Ranger offer is potentially attractive.
However, the circuit boards for the customized units will not fit
into the standard SoundScreamer case, and Arthrodax must decide
what to do about acquiring cases for the customized units as it
decides whether to accept Ranger's purchase offer.
• An appropriate case can be purchased at $500 per case, but
Arthrodax could instead purchase an injection molder to make the
cases. It will cost $20,000 to purchase the molder, and there is a
0.6 probability that it will be possible to successfully make the
cases using the molder. If the molder does not work, then the
purchase price for the molder will be totally lost and Arthrodax
must still purchase the cases at $500 per case. If the molder
works, then it will cost $60 per case to make the cases using the
molder. Unfortunately, there is no way to test the molder without
purchasing it. Assume that there is no other use for the molder
except to make the cases for the Ranger order.
• Regardless of which case is used, the cost of assembling the
SoundScreamer circuit boards into the case is $20 per unit.
1. Draw a decision tree for Arthrodax's decision about whether
to accept the Ranger order and how to acquire the cases for the
customized SoundScreamers.
2. Using expected net profit as the decision criterion, and
determine the preferred course of action for Arthrodax