Moon Micro is a small manufacturer of servers in Santa Clara, California. Lately, the demand for servers has increased, and the company needs to find a way to capitalize on the situation. The current plant has reached capacity of 10,000 units. The two options to capitalize on the situation are to either expand the plant to a capacity of 20,000 units or outsource the process to Molectron, an independent assembler. Expanding the Santa Clara plant would have an annualized fixed cost of $10,000,000 plus $500 labor per server. Hiring Molectron would cost $2000 per server built plus the $8000 for raw materials. Moon Micro sells its servers for $15,000.
Given the situation, Moon Micro wants to have projections for the next two years. For both years, the company estimates demand for servers to have an 80% chance of increasing 50% from the previous year, and a 20% chance of staying the same as the year before. On the other hand, Molectron’s prices are fixed for the first year, but have a 50% chance of increasing 20% the second year and a 50% chance of staying at the current rate.
With Moon Micro having a two year time frame, it only makes sense to compare the increases in revenue from year one to year two. This gives the company the ability to analyze the potential gains for every situation possible rather than just following the decision tree and adding year one’s revenue to year two revenue. For example, if scenario one were to occur and the company decided to have Molectron produce the servers, the company would earn $562,500,000. However, in order to properly compare each scenario, year one’s revenue should be subtracted from year two in order to clearly see how the percentages play itself out.
Through my analysis, I came up with eight different scenarios that Moon Micro could run into. The first scenario presents Moon Micro with largest possible profit because the demand is the greatest and the costs are lowest. However, the big negative with the possibility...
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