The annual demand for a seasonal product follows the distribution shown here.

The manufacturer of this item can produce it by one of the three methods:

(a) Using the existing equipment at a cost of Rs 8 per unit.
0.30 0.10

(b) Buy special equipment for Rs 22,000 whose salvage value at the end of the year would be Rs 2,000.
The variable cost per unit, using this equipment is Rs 2.

(c) Buy special equipment for Rs 90,000, which would be depreciated on straight-line basis over a period of 4 years. The variable cost using this equipment is Rs 1.20 per unit.
Which method of production should the manufacturer follow in order to maximise profit, assuming that production must meet all the demand?

Transcribed Image Text:

Demand (units) : 3,000 3,500 4,000 4,500 5,000 Probability 0.10 0.20 0.30 0.30 0.10