Sony sells its 4K OLED TV primarily in United States. Demand in the United States market is currently on average 115,000 4K OLED TV per year, and each 4K OLED TV sells for on average $1550. Although 4K OLED TV demand is expected to grow, there are some downside risks if the economy slides. From one year to the next, demand may increase by 30 percent, with probability 0.75, or decrease by 30 percent, with probability 0.25. Sony has to decide whether to build a plant in US or Mexico. In either case, Sony plans to build a plant with a rated capacity of 130,000 panels. The fixed and variable costs of the two plants are shown in Table 2 below. US Plant Mexico Plant Fixed cost ($) Variable Cost ($) Fixed cost (MXN Peso) Variable Cost (MXN Peso) 2 million/year 500/4K OLED TV 3.6 million/year 1050/4K OLED TV Observe that the fixed costs are given per year rather than as a one-time investment. The US plant is more expensive but will also have greater volume flexibility. The plant will be able to increase or decrease production anywhere in the range of 80,000 to 130,000 panels while maintaining its variable cost. If the US plant is built and the demand exceeds 130,000 Sony will have to lose sales. In contrast, the Mexican plant is cheaper (at the current exchange rate of 18.5 Peso/$) but will have limited volume flexibility and can produce only between 95,000 and 120,000 panels. If the Mexican plant is built, Sony will have to incur variable cost for 95,000 panels even if demand drops below that level and will lose sales if demand increases above 120,000 panels. Exchange rates are volatile; each year, the MXN Peso is expected to rise 15 percent, with a probability of 0.65, or drop 15 percent, with a probability of 0.35. Assuming that the sourcing decision will be in place over the next three years and the discount rate used by Sony is 15%. Consider the first year as period O and the following two years as periods 1 and 2. Draw the Decision Tree for this problem.

Sony sells its 4K OLED TV primarily in United States. Demand in the United States market is currently on average 115,000 4K OLED TV per year, and each 4K OLED TV sells for on average $1550. Although 4K OLED TV demand is expected to grow, there are some downside risks if the economy slides. From one year to the next, demand may increase by 30 percent, with probability 0.75, or decrease by 30 percent, with probability 0.25. Sony has to decide whether to build a plant in US or Mexico. In either case, Sony plans to build a plant with a rated capacity of 130,000 panels. The fixed and variable costs of the two plants are shown in Table 2 below. US Plant Mexico Plant Fixed cost ($) Variable Cost ($) Fixed cost (MXN Peso) Variable Cost (MXN Peso) 2 million/year 500/4K OLED TV 3.6 million/year 1050/4K OLED TV Observe that the fixed costs are given per year rather than as a one-time investment. The US plant is more expensive but will also have greater volume flexibility. The plant will be able to increase or decrease production anywhere in the range of 80,000 to 130,000 panels while maintaining its variable cost. If the US plant is built and the demand exceeds 130,000 Sony will have to lose sales. In contrast, the Mexican plant is cheaper (at the current exchange rate of 18.5 Peso/$) but will have limited volume flexibility and can produce only between 95,000 and 120,000 panels. If the Mexican plant is built, Sony will have to incur variable cost for 95,000 panels even if demand drops below that level and will lose sales if demand increases above 120,000 panels. Exchange rates are volatile; each year, the MXN Peso is expected to rise 15 percent, with a probability of 0.65, or drop 15 percent, with a probability of 0.35. Assuming that the sourcing decision will be in place over the next three years and the discount rate used by Sony is 15%. Consider the first year as period O and the following two years as periods 1 and 2. Draw the Decision Tree for this problem.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 46P

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