15. After graduating from college, your friends and you start an Internet auction service called TriangCom. Business has been fantastic, with 10 million customer visits—or

“hits”—to the site in the last year. You have several capacity decisions to consider. One key decision involves the number of computer servers needed. You are considering putting in 10, 20, or 30 servers. Costs and capacity limits are as follows:

In addition, marketing has developed the following demand scenarios:

Finally, TriangCom generated $5 million last year based on 10 million “hits.” Put another way, each “hit” generated, on average, $0.50 in revenue.

a. (**) Calculate the break-even point for each capacity alternative.

b. (**) At what demand level will you be indifferent to having either 10 or 20 servers?

c. (***) Calculate the expected value for each capacity alternative. (Hint: Don’t forget about capacity constraints that can limit the number of “hits” each capacity alternative can handle.) Which alternative will you prefer if you want to maximize the expected value?

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NUMBER OF FIXED COST PER VARIABLE COST PER MAXIMUM HITS PER SERVERS YEAR HIT YEAR 2280 10 $50,000 $0.005 20 million $90,000 $0.003 40 million 30 $120,000 $0.002 60 million