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An NZ - based tennis ball producer currently faces demand for 2 , 5 0 0 , 0 0 0 balls / year and is
An NZbased tennis ball producer currently faces demand for ballsyear and is currently capable of producing this many in one year. Each ball sells for $ and costs $ to produce. The producer anticipates that demand may change next year due to tennis world cup being held in New Zealand. Specifically, it is possible that tennis courtsschools may turn to European balls next year, which will reduce the demand for this producer. It is also possible that the demand may increase for this producer as the ministry of sports may encourage courtsschools to buy madeinNZ balls. It is also possible that the demand may remain unchanged. The marketing team anticipates that the demand may decrease by with probability of it may increase by with probability of and it may remain the same with probability of
The producer is considering upgrading its production line for next year so it can keep up with the possible increase in demand. The upgrade requires a fixed cost of $ and will increase the production capacity to ballsyear The unit production cost will most likely with probability remain the same, but the contractor who will implement the upgrade anticipates that with probability the upgraded production line may be more efficient and reduce the unit production cost to $ball
Construct ie draw the decision tree of this problem for the producer and with detailed analysis suggest whether the producer should pursue upgrading its production line or not. Consider only this and next year in the decision making. Assume discount factor for a year.
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