EMS is a small manufacturer of drones that currently builds its entire product in northern Italy. As the market for drones has grown significantly, the Italian plant has reached capacity of 9,500 drones per year. To increase its capacity, EMS is considering two options. The first option is to add 9,500 units of capacity to the Italian plant at an annualized fixed cost of €6 million plus €200 labor per drone. The second option is to have Vitacon, an electronics producer, manufacture the drones at a cost of €400 for each drone (excluding raw materials cost). Raw materials cost €500 per drone, and EMS sells each drone for €2,000.

EMS must make this decision for a two-year time horizon. During each year, the demand for EMS drones has an 85 percent chance of increasing 60 percent from the previous year and a 15 percent chance of remaining the same as the previous year. Vitacon’s prices may change as well. They are fixed for the first year but have a 50 percent chance of increasing 15 percent in the second year and a 50 percent chance of remaining where they are.

Use a decision tree to determine whether EMS should add capacity to its Italian plant or if it should outsource to Vitacon. What are some other factors that have not been discussed that would affect this decision?