Andre Murrell (AM) Enterprises has planned to install a sophisticated machine for the manufacture of a new product. The supplier of the machinery has just informed the company that the delivery of the machine will be delayed by six months. AM Enterprises has signed a contract to supply with immediate effect Schneel Inc with whatever quantities of the new product they require at a price of $40 per unit. Schneel Inc demand is at this stage, uncertain but would have well within the capacity of the sophisticated machine they Andre has ordered to be installed.

The best estimates for the six-month period are thought to be:

Quantity- units	Probability
20,000	0.5
28,000	0.3
32,000	0.2

AM Enterprises has decided the whatever the demand is they are going to meet it in full even if it means operating at a loss. Therefore the company is considering hiring equipment on which temporary production can take place. Details of the only machines that could be hired are:

	A	B	C
Productive capacity per six months period units	20,000	24,000	32,000
Variable production cost for each unit produced	7	6	5
Other fixed cost total for six months	$480,000	$525,000	$600,000

Raw Material cost is $5 per unit. For purchases greater than 20,000 units a discount of 20% per unit will be given on the excess only.

Should production capacity be less than demand then AM Enterprises would sub-contract production. The Subcontractor has given a price of $30 per unit. This cost excludes the cost of raw materials since AM Enterprises would be required to supply raw materials.

AM Enterprise must sign the contract now on which machine they will hire temporarily.

Required:

Determine which of the three machines that AM Enterprises should hire. [25 marks]

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