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Annual demand for a seasonal product

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Reference no: EM133090735

The annual demand for a seasonal product follows the distribution shown here.

Demand (Units) 3,000 3,500 4,000 4,500 5,000

Probability 0.10 0.20 0.30 0.30 0.10

The manufacturer of this item can produce it by one of the three methods:

a. Using the existing equipment at a cost of Kshs. 8 per unit

b. Buy special equipment for Kshs. 22,000 whose salvage value at the end of the year would be Kshs. 2000. The variable cost per unit using this equipment is Kshs. 2

c. Buy special equipment for Kshs. 90,000 which would be depreciated on straight line basis over a period of 4 years. The variable cost using this equipment is Kshs. 1.20 per unit.

Which method of production should the manufacturer follow in order to maximize profit, assuming that production must meet all the demand?

Reference no: EM133090735

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