The SweetTooth Candy Company knows it will need 10 tons of sugar six months from now to implement its production plans. The company has essentially two options for acquiring the needed sugar. It can either buy the sugar at the going market price when it is needed, six months from now, or it can buy a futures contract now. The contract guarantees delivery of the sugar in six months but the cost of purchasing it will be based on today’s market price. Assume that possible sugar futures contracts available for purchase are for five tons or ten tons only. No futures contracts can be purchased or sold in the intervening months. Thus, SweetTooth’s possible decisions are to (1) purchase a futures contract for ten tons of sugar now, (2) purchase a futures contract for five tons of sugar now and purchase five tons of sugar in six months, or (3) purchase all ten tons of needed sugar in six months. The price of sugar bought now for deliv- ery in six months is $0.0851 per pound. The transac- tion costs for five-ton and ten-ton futures contracts are $65 and $110, respectively. Finally, the company has assessed the probability distribution for the possible prices of sugar six months from now (in dollars per pound). The file P09_30.xlsx contains these possible prices and their corresponding probabilities. a. Use PrecisionTree to identify the decision that minimizes SweetTooth’s expected cost of meeting its sugar demand. b. Perform a sensitivity analysis on the optimal decision, letting each of the three currency inputs vary one at a time plus or minus 25% from its base value, and summarize your findings. Which of the inputs appears to have the largest effect on the best decision?
The SweetTooth Candy Company knows it will need 10 tons of sugar six months from now to implement its production plans. The company has essentially two options for acquiring the needed sugar. It can either buy the sugar at the going market price when it is needed, six months from now, or it can buy a futures contract now. The contract guarantees delivery of the sugar in six months but the cost of purchasing it will be based on today’s market price. Assume that possible sugar futures contracts available for purchase are for five tons or ten tons only. No futures contracts can be purchased or sold in the intervening months. Thus, SweetTooth’s possible decisions are to (1) purchase a futures contract for ten tons of sugar now, (2) purchase a futures contract for five tons of sugar now and purchase five tons of sugar in six months, or (3) purchase all ten tons of needed sugar in six months. The price of sugar bought now for deliv- ery in six months is $0.0851 per pound. The transac- tion costs for five-ton and ten-ton futures contracts are $65 and $110, respectively. Finally, the company has assessed the
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