Question 12 Not complete Points out of 4.00 An operations manager is deciding on

Question

Question 12 Not complete Points out of 4.00 An operations manager is deciding on the level of automation for a new process. The fixed cost for automation includes the equipment purchase price, installation, and initial spare parts. The variable costs per unit for each level of automation are primarily labor related. The selling price of each unit is $119. The costs of each alternative are below: Flag question Alternative Fixed Costs Variable Costs per Unit $100,000 $280,000 $560,000 $58 $37 $22 Based on past sales data, marketing has projected the following probabilities of future demand Probability Future Demand (units) 5,000 10,000 15,000 0.20 0.30 0.50 What is the expected value of the alternative that you would choose? (hint: Excel may make it easier to calculate out the decision tree of all the possible expected values. Also, there is a video clarifying this problem in Moodle.) Round your answer to the nearest whole number and DO NOT include the $ sign or a comma. For example, answer like 234050 and NOT $234,050 Answer:

Explanation / Answer

Expected demand: Units Probability Expected Units 5000 0.2 1000 10000 0.3 3000 15000 0.5 7500 Expected units 11500 Alternative A Alternative B Alternative C Sales 1,368,500 1,368,500 1,368,500 Less: variable cost A (11500@ 58) 667000 B (11500 units @ 37) 425500 C (11500 units @ 22) 253000 Contribution margin 701,500 943,000 1,115,500 Less: Fixed cost 100,000 280,000 560,000 Expected Income 601,500 663,000 555,500 Therefore, Alternative B must be choosen. The expected value is 663,000

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