The yearly demand for a seasonal, profitable item follows the distribution:Demand (units) Probability1,000202,000303,000404,00010A manufacturer is considering launching a project to produce this item and could produce it by oneof three methods:A. (10%). Use existing tools at a cost of S6 per unit.B. (10%). Buy cheap, special equipment for $1,000. The value of the equipment at the end of theyear (salvage value) is zero. The cost would be reduced to $3 per unit.C. (10%). Buy high-quality, special equipment for $10,000 that can be depreciated over four years(one fourth of the cost each year). The cost with this equipment would be only S2 per unit.Set up this project as a decision tree to find whether the manufacturer should approve this project,and if so, which method of production to use to maximize profit. Hint: Compare total annual costs.Assume that production must meet all demand; each unit demanded and sold means more profit.

Answered: Set up this project as a decision tree…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

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Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Set up this project as a decision tree to find whether the manufacturer should approve this project, and if so, which method of production to use to maximize profit. Hint: Compare total annual costs. Assume that production must meet all demand; each unit demanded and sold means more profit.