VB Plastics, Inc. VB Plastics, Inc. (VBP) specializes in the manufacturing of plastic components. Recently, an opportunity
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VB Plastics, Inc. VB Plastics, Inc. (VBP) specializes in the manufacturing of plastic components. Recently, an opportunity arose to produce a new product - TC2001 - which appears to have relatively high, sustainable demand. However, two components of the production process - (1) the raw materials' molecular structure and (2) the production process itself - involve uncertainty. This uncertainty has implications for the quality of finished units of TC2001 (superior versus average), and, ultimately, VBP's profits. Raw Material Molecular Structure Raw materials vary in molecular structure. Specifically, raw materials can either be long-form or short-form. Only long-form molecularly-structured materials can yield superior quality units. If the materials are short-form, the resulting finished units of TC2001 are average quality. While suppliers can guarantee that an entire batch of raw materials is of uniform molecular structure (i.e., all of the raw materials in a batch are either long-form or short-form), they cannot guarantee which type a batch is, as molecular structure is difficult to observe accurately. On average, half of the materials available in the market eventually prove to be long-form structure. Production Process Choice VBP could use one of three manufacturing processes. Process A uses a simplified process, and yields average quality units. Process B uses a different set of machinery, which has better temperature controls, but fails to control pressure in the molding process. Thus, Process B can produce superior quality units, but only if molding pressure falls within acceptable levels (and the molecular structure is long- form). The acceptable threshold is 150 PSI. That is, as long as the pressure is equal to or exceeds 150 PSI, then the process is capable of superior quality units. Past experience using these Process-B-machines is presented in Table 1. The above denotes pressure readings on the same machines that would be used for Process 2 manufacturing of TC2001 units. Process C involves machinery that has even greater controls than Process B machinery, including controls over molding pressure. Thus, Process C guarantees superior quality units (assuming that the molecular structure of raw materials is long-form).1 1 VBP currently owns the machines necessary for Process A, B, or C, and these machines currently have capacity. However, given the batch-level manufacturing approach, a single process needs to be selected for each batch, so that the capacity of the other machines can be allocated to other products and production runs. 2
Profitability Implications Revenues are a function of whether the final product is of superior quality or average quality. There is sufficient demand for both types of product, but the price charged for each quality level differs. Specifically, superior quality units command a price of $0.60 per kilogram; average quality units command a price of $0.49 per kilogram. Projected costs are as follows: ? Process A: $0.12 per kilogram; $300 setup per batch ? Process B: $0.15 per kilogram; $500 setup per batch ? Process C: $0.17 per kilogram; $950 setup per batch Assume that the level of production being considered is a single batch of 90,000 kilograms. Other Information - Potential for Testing VBP recently learned of an opportunity to test the raw materials after they are purchased, but before they are put into production (i.e., and thus before the production process is selected). Testing involves a complex process, the costs of which are difficult to anticipate. The developer of the test offered the following information regarding the average performance of the testing: ? For materials known to be long-form, 96% tested as "large", and 4% tested as "non- large" ? For materials known to be short-form, 24% tested as "large", and 76% tested as "non-large" Note: Given the imperfect nature of the test, the developer does not refer to test results as "long-form" and "short-form", but rather the corresponding categories of "large" and "non-large", respectively
1. How much would VBP be willing to pay for the testing of molecular structure that is currently offered, for each batch? Provide detailed support - including a decision tree - for your answer. 2. How much would VBP be willing to pay for a "perfect" test of molecular structure, for each batch? Provide detailed support - including a decision tree - for your answer.
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