1. Using a decision tree based on maximizing expected profit, decide which machine Toledo Leather should select. Should overtime be scheduled? Or should a machine be modified and, if so, under what circumstances?

2. Set up a payoff matrix for the sales volumes given (assume the machines cannot be modified and overtime is used), and assume that the probabilities for the five levels of sales are not known. Then decide which machine should be purchased using the maximax criterion, the maximin criterion, and the equally likely criterion.

SALES VOLUME ___________________ PROBABILITY

120,000 units .........................................0.15

130,000 units .........................................0.25

140,000 units .........................................0.40

150,000 units .........................................0.15

160,000 units .........................................0.05

The Toledo Leather Company has been producing leather goods for more than 30 years. It purchases prepared hides from tanners and produces leather clothing accessories such as wallets, belts, and handbags. The firm has just developed a new leather product and has prepared a 1-year production and sales plan for it. The new product is best described as a combination billfold, key case, and credit card carrier. As company president Peggy Lane has noted, "It is a super carryall for small this-and-that." Lane has placed her administrative assistant, Harold Hamilton, in charge of the project.

Hamilton has established that material and variable overhead for the carryall should be about $1.50 per case over the next year given a 5-day week and no overtime. Unit labor and machining costs, however, depend on the choice of machine that will be used for production. Hamilton has narrowed the choice down to two specialized pieces of equipment. Machine 1 is a semi-automated machine that will cut the material to the size needed for one unit and also will sew it, install the rings and snaps, and emboss it with two types of designs. This machine costs $250,000 and will add $2.50 per case to the average variable cost for labor and other machine-related costs. This piece of equipment has a production capacity of 640 units per day. However, estimated downtime for maintenance and repairs is 12.5% (1/8 of the total time).