Calculate the expected value for the two capacity options

Assignment Help Financial Management

Reference no: EM131994936

HCYE has been in the yogurt business for a couple of years now. In the past annual financial period they sold 14,400 pounds of yogurt. By converting everything to pounds they have determined that they buy the yogurt for $3.00 per pound and sell it for $7.00 per pound.

Although they have been quite successful they are now considering purchasing a yogurt churner that will allow them to make their own yogurt. This churner is capable of producing 40,000 pounds of yogurt per year. By making the yogurt themselves HCYE can reduce their yogurt costs to $1.60 per pound. HCYE also knows that there is considerable cost related to the churner such as fixed costs for training, lease, etc. that will run about $35,000 per year.

This churner will be able to produce significantly more than the 14,400 pounds that they currently sell on Campus. After evaluating some options HCYE feels they can sell some of their yogurt to other local shops for $2.90 per pound. HCYE has calculated the three demand possibilities all of which have an equal probability of occurring:

?Low Demand??18,000 pounds per year (includes the 14,400 pounds for campus)

?Medium Demand?25,000 pounds per year (includes the 14,400 pounds for campus)

?High Demand??35,000 pounds per year (includes the 14,400 pounds for campus)

Draw and properly label the Decision Tree for the churner decision.

1. If HCYE does not invest in the churner do they need to concern themselves with the different demand scenarios shown above? Why or Why not? Explain.

2. Calculate the expected value for the two capacity options. Don’t forget that for the churner option any demand above 14,400 pounds will generate revenues of only $2.90 per pound.

3. Update the Decision Tree to include these new results.

4. What is the worst AND best possible financial outcome for HCYE?

5. What other factors such as core competency, strategic flexibility, etc. should HCYE consider when making this decision?

Reference no: EM131994936

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