Question

BillMarCo Inc. produces gas pumps around the world and is deciding whether to locate its new manufacturing facility in Europe in Germany or in Slovenia. At either location, the facility will be designed to be able to produce up to 51,000 units. The company forecasts its annual demand for gas pumps made in Europe at 46,000.

In Slovenia, the annual fixed cost of production is $320,000, the profit margin per unit is $35, and there is no chance of a labor strike.

In Germany, the annual fixed cost of production is $570,000 and the profit margin per unit is $38. A labor strike occurs in Germany with probability with probability 0.77 which limits the effective capacity to 64% of the design capacity of the facility. If no labor strike occurs, the facility in Germany can produce the same number of units as the facility in Slovenia.

Draw a decision tree to analyze this problem. Calculate the expected annual profit for locating the facility in Slovenia and in Germany. Enter the maximum expected annual profit of the two options rounded to the nearest dollar.

Answer 1

Solution

Its is mentioned that in both locations the facility will be designed to produce 51000 units.

In Germany the profit margin per unit is $38

In solvenia the profit margin per unit is $35

Lets assume in both locations 51000 unites are produced

So total cost is 38*51000= $1938000

35*51000=1785000

The decision tree is as follows after that expected values are calculated

The expected annual profit for locating facility in Germany is

= 20335046.4 - 570,000= $19765046.4

For locating in Solvenia is

= 1785000 - 320000 = $1465000

The expected profit is high in Germany though it involves with the risk of labour strike.