Concept explainers
A manager is trying to decide whether to buy one machine or two. If only one machine is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales would be lost, however, because the lead time for delivery of this type of machine is 6 months. In addition, the cost per machine will be lower if both machines are purchased at the same time. The probability of low demand is estimated to be 0.30 and that of high demand to be 0.70. The after tax
If one machine is purchased and demand is low, the NPV is $120,000. If demand is high, the manager has three options: (1) doing nothing, which has an NPV of $120,000; (2) subcontracting, with an NPV of $140,000; and (3) buying the second machine, with an NPV of $130,000.
- Draw a decision tree for this problem.
- What is the best decision and what is its expected payoff?
Want to see the full answer?
Check out a sample textbook solutionChapter 4 Solutions
Operations Management: Processes and Supply Chains (12th Edition) (What's New in Operations Management)
Additional Business Textbook Solutions
Principles of Operations Management: Sustainability and Supply Chain Management (10th Edition)
Principles Of Operations Management
Loose-leaf for Operations Management (The Mcgraw-hill Series in Operations and Decision Sciences)
Operations Management
Operations Management
OPERATIONS MANAGEMENT IN THE SUPPLY CHAIN: DECISIONS & CASES (Mcgraw-hill Series Operations and Decision Sciences)
- Company QXL has generated $1 million in gross sales for Q4, 2021, which is 5% higher than its gross sales for Q3, 2021. However, Q4 is considered as the peak season for QXL. Comparing with the previous peak season, its current Q4 gross sales are 2% lower than the gross sales for Q4 2020. When a client asks Winona (who is a financial planner) for investment advice on QXL, Winona suggests the client to invest in QXL. She only presents the percentage change in gross sales from Q3 to Q4 2021 (i.e. 5% increase) and tells the clients that this is a positive signal of increase in its future price. You are required to establish what is unethical and which Standard is most likely violated.arrow_forwardFedori Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machinery Division has asked the Parts Division to provide it with 4,000 special parts each year. The special parts would require P23.00 per unit in variable production costs. The Machinery Division has a bid from an outside supplier for the special parts at P37.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the YR24 that it presently is producing. The YR24 sells for P40.00 per unit, and requires P28.00 per unit in variable production costs. Packaging and shipping costs of the YR24 are P3.00 per unit. Packaging and shipping costs for the new special part would be only P1.50 per unit. The Parts Division is now producing and selling 15,000 units of the YR24 each year. Production and sales of the YR24 would drop by 20% if the new special part is produced for…arrow_forwardA machine tool salesperson offers XY plant equipment that would increase their fixed cost by $180,000, but reduce their variable cost from $40.00 to $25.00. Should the plant accept this suggestion if they can sell their entire plant capacity of 10,000 units per year at $100 each? Q= unitsarrow_forward
- Jane Woodhurst is considering whether to buy one or two machines for a certain stage of the assembly line at a new electric car startup company.If one machine is purchased initially, a second one can be purchased later after observing demand.However buying the machines together is cheaper.Also the lead time to get a machine is long, so there may be lost sales if the decision to buy the 2nd machine is taken later after seeing high demand. Jane estimates that demand may be low with a probability of 0.25, or medium with a probability of 0.3, or high with a probability of 0.45 If two machines are purchased the payoffs are 90,000$ for low demand, 200,000$ for medium demand, and 500,000$ for high demand. If one machine is purchased, then no additional decision is required if the demand is low or medium (as one machine can handle these cases). However if the demand is high, Jane has 3 options: outsource some production, buy a 2nd machine, do nothing (live with 1 machine) If one machine is…arrow_forwardI need the answer quicklyarrow_forwardA Company Is Considering Buying One Of The Following Two Machines. Show the complete solution for each question.arrow_forward
- A building has an NO of $130,000 and is being valued with acap rate of 4%. Using the income approach, what is the value of the building? $3,250,000 $2.450,000 $1,300,000 $4.130,000arrow_forward* 00 Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. States of Nature Lower gas Gas prices Higher gas Alternatives prices unchanged prices Subcompact 19,000 000 Compact OGOʻST 000 Full size 000'9 Probability 0.3 0.5 0.2 MacBook Air 000 000 DD F7 08 F4 F5 6 %24 ) 9 | K. D.arrow_forwardA 3 year-old a computer-controlled fabric cutting machine, which had a $25,000 purchasing price, has a current market (trade-in) value of $10,000 and expected O&M costs of $4,000, increasing by 1,000 per year. The machine is required to have an immediate repair that costs $2,000. The estimated market values are expected to decline by 20% annually (going forward). The machine can be used for another 7 years at most. The new machine has a $40,000 purchasing price. The new machine's O&M cost is estimated to be $4,000 for the first year, decreasing at an annual rate of $100 thereafter. The firm's MARR is 10%. Assume a unique minimum AEC(10%) for both machines (both the current and replacement machine). Using the information above, determine the economic service life along with the optimum annual equivalent cost of the defender (This is an infinite Horizon decision problem). a) n=4 and AEC=Between $8,400 and $8,800 b) n=4 and AEC=Between $8,000 and $8,400 c) n=5 and AEC=Between $8,400 and…arrow_forward
- Would the choice of denominator level affect the amount of the fixed factory overhead budget variance? Fixed overhead production volume variance? Explainarrow_forwardChange information to 95,000 to install, but will increase customer traffic in the store by 12,000 customers per year. Assume a discount rate of 7%arrow_forwardA farmer in mufulira, copper belt province of Zambia would like to introduce a new product .it has estimated that the cost of purchasing, delivery and installation the new machine required to manufacture the product is k160, 000.the expected life span of the product is six years. The first revenues 200,000 second 240,000 and 220,000, Revenues estimates are k205,000 in each of the remaining three years. The incremental variable of producing the product are estimated to be 54% of the revenues. The marginal tax rate of the farm is 40% of the revenues. The machine purchased will have a salvage value of k35,000 and the farm is expecting to recoup k10,000 of its working capital at the end of six years. The farm has fixed cost of k30,000.a. Calculate the IRR at a discount rate of your choice.arrow_forward
- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,Operations ManagementOperations ManagementISBN:9781259667473Author:William J StevensonPublisher:McGraw-Hill EducationOperations and Supply Chain Management (Mcgraw-hi...Operations ManagementISBN:9781259666100Author:F. Robert Jacobs, Richard B ChasePublisher:McGraw-Hill Education
- Purchasing and Supply Chain ManagementOperations ManagementISBN:9781285869681Author:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. PattersonPublisher:Cengage LearningProduction and Operations Analysis, Seventh Editi...Operations ManagementISBN:9781478623069Author:Steven Nahmias, Tava Lennon OlsenPublisher:Waveland Press, Inc.