You are a consultant for Moon Micro, a manufacturer of computer systems, that currently has a capacity of 10,000 computers and its demand has reached 10,000, but expects the demand for its computers would increase in the next two years. You have two options. One is to increase Moon Micro’s existing capacity by 10,000 units at an annualized fixed cost of $4 million plus $100 labor cost per computer.   The second option is to buy computers from a supplier, Goodcomp at a cost of $800 (excluding raw materials cost). Raw material cost $600 per computer.

You must make a decision for a two-year time horizon. The demand for your computers has a 60 percent chance of increasing 40 percent from the year before and 40 percent chance of remaining the same as the year before.

1. Make a decision tree and show the increased demand (more than 10,000). (10 points)
2. Compute the costs (payoffs) and determine the expected cost for each of the options. (25)
3. Use a decision tree to determine whether moon should add capacity or buy computers to meet demand more than its existing capacity from Goodcomp. Assume that costs are incurred at the beginning of each year. Use an annual discount factor of 10%. (5)

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