A Manager of a Manufacturing Enterprise Is Considering Whether to Produce

Essay

A manager of a manufacturing enterprise is considering whether to produce an intermediate good in house or to buy it from another firm. If the good is produced in house, three potential outcomes are possible: (i)if production is done in one shift, then expected profit is -$30 000 per year, (ii)if production is done in two shifts, then expected profit is $10 000, and (iii)if production is done in three shifts, then expected profit is $55 000. Probabilities associated with these outcomes were estimated as 35%, 45% and 20% respectively. However, if the good is purchased, two potential outcomes arise: (i)on-time delivery of the good results in $20 000 of expected profit, (ii)delays in delivery result in an expected loss of -$17 000. Probabilities of these outcomes are 60% and 40% respectively. Draw a decision tree, and execute it to make a decision.