Hello Experts- I need help with the following question. Can you please provide c

Question

Hello Experts- I need help with the following question. Can you please provide clear step by step answer in excel and show your work so with formulas if possible so I can follow and learn. Thank you in advance for your help!

Diversitek was approached by Ambassador Automobiles for a rush order of 100 units of customized suspension subsystems at $5000 per unit. Diversitek has to make the decision whether to accept this offer or not. They have developed similar systems but not exactly like the one in this order. The design is straight forward and would involve a fixed cost of $100,000 and a variable cost of $2000 per unit. These customized products are held together with a plastic bracket which is available for purchase for $500 per unit. They can also be injection molded which will require to buy a molding unit for $20,000. Once the unit is purchased, the plastic brackets can be manufactured at $60 per piece. But there is no guarantee that this process will work. The probability of success is 60% and it is impossible to figure if this process will work without purchasing the molding unit. If this does not work Diversitek has the option to pay $500 per unit and purchase the bracket. Regardless of which case is used, there is an additional assembly charge of $20 per unit.

A. Draw a decision tree to decide whether Diversitek should accept the Ambassador Automobile’s offer or not and also decide on the process they should use to acquire the plastic bracket.

B. Using the Expected profit as a decision criterion determine the preferred course of action for Diversitek.

Ambassador Automobiles is not sure of their order of 100 units. Based on the market research they think there is only a 35% chance they require 100 units and a 65% chance they only need 50 units. If they only order 50 units they are willing to pay $6000 per unit and for an order of 100, they will pay $5000 a unit. Because of the timing, the decision to buy the plastic bracket or purchasing the molding unit and produce the bracket in-house cannot wait for the number of orders. However the fixed and the variable costs do not change with the order size. Given the new conditions, find the solution to the two questions stated above.

C. Use Influence diagram for at least one of the situations.

Explanation / Answer

Solution

Part (A)

Alternative 1: Out-source Bracket and assemble

Total Cost C = 100000 (Fixed cost) + n x Variable cost per unit { = 2000(manufacturing cost) + 500(Bracket cost) + 20 (assembly cost), where n = number of units produced. i.e.,

C = 100000 + 2520n ....... (1)

Total Sales Revenue = n x Price per unit = 5000n ...... (2)

For break-even 'n' (i.e., n at which C = R, or no-proft-no-loss situation), 100000 + 2520n = 5000n or

n = 100000/2480 = 40.32

Since n < 100, producing 100 units would only yield profit.

Hence, the company must go for the order ANSWER Option 1

Alternative 2: Make Bracket and assemble

In case, total cost of bracket = 20000 (cost of molding unit) + n x 60 (cost of making one bracket)

= 20000 + 60n or cost per bracket = 60 + (20000/n) ...... (3)

But, (3) holds good only for 60% of the time since P(molding unit would be successful) = 0.6 (given) and

hence 40% of the time bracket has to bought out. Thus, effective cost per bracket

= 0.6{60 + (20000/n)} + (0.4 x 500) = 236 + (20000/n).

Thus, Total Cost C = 100000 (Fixed cost) + n x Variable cost per unit { = 2000(manufacturing cost) + [236 +  (20000/n)}(Bracket cost) + 20 (assembly cost)  

= 100000 + 2256n + 20000 = 120000 + 2256n ...... (4)

For break-even n, (4) must be equal to (2) or 120000 + 2256n = 5000n or n = 120000/2744 = 43.73.  

Since n < 100, producing 100 units would only yield profit.

Hence, the company must go for the order ANSWER Option 2

Now, since n in option1 < n in option 2, company must go for option 1.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.