Decision Tree

You are a logistics manager for Alphasmart, a smartphone manufacturer. You are trying to select a single supplier for the raw materials for your product. Two companies can provide the necessary materials - Hunts and Madis. Hunts has sufficient capacity to meet your demand and charges $3.00 per unit. Madis is a small supplier with a limited capacity, can supply up to 60,000 units per year, and charges $2.50 per unit of the raw material. If you do not get raw material from your supplier, you buy from the spot market at \$5 per unit. Alphasmart sold 40,000 smartphones last year and estimates demand for smartphones to go up by 30% with a probability of 60 percent and to remain the same as last year with a probability of 40% for the first year and the second year as well. Alphasmart uses a discount rate of 8 percent. Assume all costs are incurred at the end of the year and only one supplier needs to be selected to supply raw materials for the next two years. Which supplier will you select based on the present value of your annual cost? (60) Note: you need to discount the first year as well he second-year payoffs. Presentvalue=(1+discountfactor)nFuturevalue,nis umber of years