Question
Reliable is a cell phone manufacturer serving the Asian and North American markets. Current annual demand of its product in Asia is 2 million, whereas
Reliable is a cell phone manufacturer serving the Asian and North American markets. Current annual demand of its product in Asia is 2 million, whereas the demand in North America is 4, million. Over the next two years, demand in Asia is expected to go up either by 50 percent with a probability of 0.7 or by 20 percent with a probability of 0.3. Over the same period, demand in North America is expected to go up by 10 percent with a probability of 0.5 or go down 10 percent with a probability of 0.5. Reliable would like to analyze the following options: Option 1: build a production facility in Asia with a capacity of 4 million units per year and a facility in North America with a capacity of 4.5 million per year. Option 2: build a production facility in Asia with a capacity of 3.5 million units per year and a facility in North America with a capacity of 5 million per year. The marginal capacity cost per phone in Asia is $15, and $17 in North America. Each phone sells for $40 in the North American market and $36 in the Asian market. Assume that Reliable uses a discount factor of 10 percent. What do you recommend? Option 1 or 2? Use Excel
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