Specialty Brakes is a medium-size company that manufactures brake drums and is a supplier to OEMs as well as to the spare part market. Sales manager William Frail reports the results of a market survey upon which he has predicted sales for the next 3 years (Table 10.15). With this information, Michael Bake, vice president of operations, estimates probabilistic demand for each of the next 3 years. Dex Peditor, the production manager, reports that he has studied the predictions and has been looking at avenues for expanding the capacity of the plant. The required expansion could be achieved by investing in additional production lines. Each additional line costs $3 million and adds 150,000 units of capacity. Addition of lines also results in a corresponding decrease in unit variable cost of manufacturing. The selling price per unit is $50. Table 10.15 shows the data relating to the demand, and Table 10.16 shows the relative costs of adding production lines.

 

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a. Construct a schematic tree b. Construct and solve tree by hand TABLE 10.15: Demand data. Average Annual Demand (Million #) Proposal No change Add one line Add two line Level Low Medium High TABLE 10.16: Cost data. 0.55 0.80 0.90 Investment per Year ($Million) 0 3 6 Probability 0.3 0.4 0.3 Average Annual Capacity (Million #) 0.60 0.75 0.90 Variable Cost ($ per Unit) 26.00 22.00 21.00 a. Construct a schematic tree b. Construct and solve tree by hand TABLE 10.15: Demand data. Average Annual Demand (Million #) Proposal No change Add one line Add two line Level Low Medium High TABLE 10.16: Cost data. 0.55 0.80 0.90 Investment per Year ($Million) 0 3 6 Probability 0.3 0.4 0.3 Average Annual Capacity (Million #) 0.60 0.75 0.90 Variable Cost ($ per Unit) 26.00 22.00 21.00

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a Constructing the schematic tree Year 1 Year 2 Year 3 Low 03 Medium 04 Low 03 Medium 04 Low 03 Medi... View the full answer