A manufacturing of electronic accessories for use in computers currently has a capacity of 40000 pieces. Per month the business strategy group for the company recently performed a forecasting exercise to assess the emerging demand for the accessories in the next five years. The study revealed that there is a 40 percent probability that the The study growth in demand for the accessories will be strong during this planning horizon and a 60 percent probability that the growth in demand will be moderate. identified three options for the manufacturer to augment capacity.

 Option 1 is to expand the capacity by adding new capacity to meet the demand. 

Option 2 is to augment capacity in the existing factory itself by some de-bottlenecking operation (in which case there will be limits to capacity expansion). 

Option 3 is to go for subcontracting if there is a strong growth in demand, then the new capacity could be added a year later. 

The study revealed the following additional information about the emerging scenario and the costs and benefits of each of the following alternatives.

1. The cost of adding new capacity is Rs 750 000. This cost goes up by 5 percent if it is deferred by a year. (one your Later) 

2. The cost of expanding in the existing factory itself is Rs 275 000.

3. The cost of subcontracting is negligible, as no major investments are envisaged either at the supplier side or at the manufacturer side.

4. The revenue occurring from new capacity is as follows. If it is a strong growth. the revenue will be Rs 850 000 and in the case of a moderate growth, the revenue will be Rs 400 000. These figures do not change even if the new unit comes into operation a year later.

5. The revenue accruing from the expansion of the existing capacity is as follows. If it is a strong growth, the revenue will be Rs 550 000 and in the case of a moderate growth, the revenue will be Rs 300 000.

6. The revenue accruing from the existing factory with subcontracting is as follows. If there is strong growth, the revenue will be Rs 350 000 and in the case of moderate growth, the revenue will be Rs 180 000.

Arrive at an appropriate capacity planning strategy using a decision tree. All revenues are yearly figures.

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