The yearly demand for a seasonal, profitable item follows the distribution below:

A manufacturer is considering launching a project to produce this item and could produce it by one of three methods:

a. Use existing tools at a cost of $6 per unit.

b. Buy cheap, special equipment for $1,000. The value of the equipment at the end of the year (salvage value) is zero. The cost would be reduced to $3 per unit.

c. Buy high-quality, special equipment for $10,000 that can be depreciated over four years (one fourth of the cost each year). The cost with this equipment would be only $2 per unit.

Set up this project as a decision tree to find whether the manufacturer should approve this project, and if so, which method of production to use to maximize profit. Hint: Compare total annual costs. Assume production must meet all demand; each unit demanded and sold means more profit.

Demand (units)	Probability
1,000	.20
2,000	.30
3,000	.40
4,000	.10

Answer rating: 100% (QA)

Expected Value using Decision Tree Method The expected value is the combination of the prob... View the full answer