Reference no: EM1388121
A company selling mechanical tools is expecting to sell 1200, 2000, 1600, and 800 tools in the first, second, third, and fouth quaters of the year. At the beginning of the year the company has 30 workers and no inventory. The cost of hiring and layoff are $1200 and $2000 per worker respectively. Each worker can produce 40 units of tools every quater. Each worker is paid $1000 per month ($3000 per quarter). There is no overtime or subcontracting option. Inventory holding cost and backorder cost are $5 unit/quarter and $15 per unit quarter. The selling price for each tool is $150.
In the future it is expected that the labor costs will increase by 15%. The increase will take place at the beginning of the second, third,or fourth quarters with probabilities of 20%, 40% and 40% respectively. The increase in cost will occur once. That is the increase will happen in exactly one of the quarters according to the above probabilities.
Increase in labor cost will also affect the hiring/firing costs in the same manner ( i.e., 15% increase in hiring/firing costs). Under this scenario, the company would like to find out which of the following two policies will incur highest profits:
1)Chase strategy - The workers are hired and fired in a way that total inventory and stockouts are always zero.
2) Level Strategy- The company hires 5 workers at the beginning and keeps the workforce unchanged throughout the planning horizon.
Using decision trees determine which strategy incurs higher expected profits for the company. ( Use 10% quarterly discount rate).
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