Question
New Hydraulics Inc. that produces hydraulic systems is considering changing the level of automation of its production line. There are two alternatives of full automation
New Hydraulics Inc. that produces hydraulic systems is considering changing the level of automation of its production line. There are two alternatives of full automation and semi- automation on the table. The company still has the option of sticking to its current system and choosing to do nothing. Implementation of the full automation needs to be done in two phases. The first phase towards full automation is a pilot test by fully automating only 25 percent of the production line and running the system to see its success level. The cost of implementing the first phase is $15,000. In this phase, there is 60% chance that the pilot test is successful (and 40% chance for the failure of phase I). If the result of phase I is a success, the company can move to phase II by fully automating the entire production line, with a cost of $50,000 for the implementation of this phase. At this stage, there will be 85% chance for the success of Phase II with an additional (comparing to do nothing case) income of $500,000 for the company. If the implementation of phase II fails at this stage, the additional revenue will only be $50,000. If however, phase I (pilot test) of implementing fully automation fails, the company has two options: 1) continue to phase II regardless and 2) conduct a root cause analysis of the reasons for which phase I failed and implement phase II after some corrective actions. The cost of option 1 is the same as the cost of implementing phase II, as listed above ($50,000). However, the cost of implementing option 2 is $65,000. If option 1 (implementation of phase II although phase I failed) is taken, the probability of success in implementing phase II will only be 35% with an additional income of $400,000, and if phase II implementation fails, the additional income will be lowered to $40,000. If option 2 (root cause analysis and implementing phase II after corrective actions) is taken, there is a 90% chance for the success of implementing phase II that leads to an additional income of $500,000 and 10% chance of its failure with only $50,000 additional income as the outcome. New Hydraulics Inc. has another option, as discussed before, which is semi-automation. If this decision is made, there is 85% chance of success with an additional income of $300,000 for the company. If, however, the semi-automation strategy fails, the company gains no additional income. The cost of implementing the semi-automation strategy is $30,000.
Based on the provided description, what is the best decision for the New Hydraulics Inc. as far as level of automation and the implementation of phases if any? Develop a decision tree and provide all necessary details and calculations to support your argument.
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