Answer Happy

QUESTION 2 /15 (a) A company must decide if it will make or buy an item it needs. They can make the item for $10 per unit, but must invest $15,000 in tooling to achieve that capability. A subcontractor has quoted a total price of $12 per unit to supply the quantity required. What is the break even quantity in this situation? sketch State clearly what will be the restaurant decision if the demand is above this quantity. (b) 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 NPV of the benefits from purchasing two machines together is $90,000 if demand is low and $170,000 if demand is high. 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 and define what is the best decision and the expected payoff