Tri-Products is trying to decide whether to make or purchase an accessory for one of its products.
Question:
Tri-Products is trying to decide whether to make or purchase an accessory for one of its products. The tables below indicate the projected sale price of said product together with the cost of the accessory if it is purchased (outsourced), which causes that there really is no other cost per unit than that indicated in said table and which is would pay the supplier of that accessory. If it is produced internally, they have two possibilities: Process A, which would require an investment for the design and purchase of equipment for a total cost and a cost per unit as indicated in the corresponding table. For its part, Process B only requires investment costs and cost per unit that also appear in said table. Regardless of whether the accessory is manufactured or outsourced, there are certain probabilities and sales levels in units as indicated in the first table.
Sales Price | Outsourced Cost | high demand (prob 50%) | low demand (prob. 50%) |
$11 | $7 | 110,000 | 55,000 |
Process | Investment | Cost |
A | $125,000 | $5/unit |
B | $110,000 | $6/unit |
a) Construct an appropriate decision tree for the alternatives and results presented.
b) Determine the best strategy using the Expected Monetary Value (EMV).
Statistics for Business and Economics
ISBN: 978-0132930192
8th edition
Authors: Paul Newbold, William Carlson, Betty Thorne