Exhibit 1: Memo from Wynona Hill, sales manager Hi, C. J.:

Here is the information you requested about our current and future sales projections: Our annual production and sales volume has held relatively steady over the last few years at about 3,800 units based on an average price per guitar of $800 (calculated as a weighted average based on the mix of sales of the three models). However, I expect future sales could increase significantly if we expand our throughput as Tanya believes we could with the proposed new technology. You asked me to do a probability assessment of various sales scenarios. Ill admit its been a while since I had a statistics class, but my staff and I gave it our best shot. At this time we figure that 5,000 units is a reasonable expected sales level, with a standard deviation of about 1,100 units. You might think 5,000 units is an overly optimistic sales forecast, but with our large and growing backlog of orders we have every confidence that well make or exceed that 5,000 unit target. Its not really a stretch for us. I strongly encourage you to consider Tanyas proposal. I know Im just the sales manager and not an analyst, but my calculations indicate that with the new production method and the associated cost data provided by Tanya (and no change in either our pricing or relative mix of model sales) we should have annual net operating income of $560,000 on 5,000 units. By contrast, with the current technology and continuing sales of 3,800 units per year we should be generating NOI of only $96,000. And the difference in income only gets larger the more we increase production and sales. Thanks, Wynona B.

Exhibit 2: Memo from Tanya Cline, production manager C.J.

Thank you for your diligent work analyzing the need for the new production technology. You asked me to provide cost information on the current production process and expected cost data if the firm were to adopt the new technology. With the existing technology our variable cost per unit is $480 and annual fixed costs, including maintenance expenses, total $1,120,000. However, with the proposed new technology variable costs are projected to be cut in half to $240 per unit while fixed costs are expected to double to $2,240,000. Given the anticipated new cost structure and no change in the pricing structure of our guitars, the breakeven level of sales is expected to increase from 3,500 units currently to 4,000 units with the new production method. As Wynona has reported, current sales are 3,800 units, modestly above the breakeven level of 3,500 units. And, certainly, with no increase in sales there would be no reason to trade out the current production process for a newer, more advanced technology since the breakeven level of sales with the new technology (4,000 units) would exceed current sales. However, given the backlog of orders and growing demand for Nelson guitars, as reflected in Wynonas sales projections, there is ample justification for adopting the new technology and breaking the current logjam in production. Again, thank you for your analytical work on this project. Though I obviously feel very strongly that we should move forward with the installation of the new production method, I appreciate your genuine concern for the firm and its financial stability going forward. All the best, Tanya

3.Calculate the sales volume at which NOI for Nelson is the same under both production methods and show that sales level on the graph.

4.Assume that Wynonas sales projections come from a normal distribution and the weighted average price of the mix of guitars sold by Nelson is $800 per guitar. Create a graph of a probability distribution of sales with an expected sales level, E(Q), of 5,000 units and a standard deviation of 1,100 units. (Be sure the left tail of the probability distribution extends beyond the breakeven level of output for the current production method.) What is the expected net operating income, E(NOI), and the probability of an operating loss with the current technology? With the proposed technology? Identify the areas of operating loss with each technology under the probability distribution.