Reference no: EM132977414

A cell phone manufacturing company is trying to figure out the best method to produce its new flagship product line. The three options available to the company are fully automated, repetitive and subcontracting. The fully automated process will require a fixed cost of $40,000 and has variable cost probabilities of 0.4 for $4.00 per unit and 0.6 for $5.00 per unit. The repetitive process has a fixed cost of $25,000 and has variable cost probabilities of 0.3 for $6.00 per unit and 0.7 for $8.00 per unit. Outsourcing the production to a subcontractor will not require any fixed cost investment but each unit will cost the firm $10.00. Each product sells for $20.00. The marketing department of the company has advised that due to certain economic uncertainties there is a 60% chance that the product will yield an annual demand of 5000 units and there is a 40% chance that the demand will only be 2500 units.

Calculate the expected monetary value of each option with the help of a decision tree and advise the management of the company as to which option you think is the best choice.