A firm decides whether to produce products by an onshore plant or an offshore plant. The fixed cost and the variable cost of the onshore plant are $40,000 and $1.2, while the fixed cost and the variable cost of the offshore plant are $30,000 and $1.0 (suppose the variable costs include all costs related to production and transportation.) However, although the offshore plant has lower cost, the reliability of the two plants are different: while the onshore plant can always guarantee to satisfy all order request, the offshore plant has 60% probability to meet all order request and 40% probability to satisfy only 80% of the order request. The demand in the next season is 20,000 and the marginal revenue of each unit of product is $5. Question: Which plant should the firm choose?

* Please provide the solution using a decision tree. I need this done via a detailed decision tree that shows net profit for high demand, and low demand cases. 2 Separate decision trees for onshore and offshore. I also need the analysis to show expected value of net profit for onshore and offshore.

Answer rating: 100% (QA)

To solve this problem well construct decision trees for both the onshore and offshore plants and cal... View the full answer