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
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).
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
a The decision tree for the different level of demands is shown below b Since the cost fact...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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