After graduating from college, your friends and you start an Internet auction service called TriangCom. Business has been fantastic, with 10 million customer visits—or “hits”—to the site in the past year. You have several capacity decisions to consider. One key decision involves the number of computer servers needed. You are considering putting in 10, 20, or 30 servers. Costs and capacity limits are as follows:
In addition, marketing has developed the following demand scenarios:
YEARLY DEMAND PROBABILITY
15 million hits....... 30%
30 million hits....... 60%
45 million hits....... 10%
Finally, TriangCom generated $5 million last year, based on 10 million hits. Put another way, each hit generated, on average, $0.50 in revenue.
a. Calculate the break-even point for each capacity alternative.
b. At what demand level will you be indifferent to having either 10 or 20 servers?
c. Calculate the expected value for each capacity alternative. Which alternative will you prefer if you want to maximize the expected value?