Determine the preferred course of action for arthrodax

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Reference no: EM132260466

Arthrodax Company has been approached by Ranger Sound with a rush order offer to purchase 100 units of a customized version of Arthrodax's SoundScreamer audio mixer at $5,000 per unit, and Arthrodax needs to decide how to respond.

The electronic modifications of the standard SoundScreamer needed for this customized version are straightforward, but there will be a fixed cost of $100,000 to design the modifications and set up for assembly of the customized SoundScreamers, regardless of the number of units produced. It will cost $2,000 per unit to manufacture the circuit boards for the units. Since Arthrodax has some short-term spare manufacturing capacity, the Ranger offer is potentially attractive. However, the circuit boards for the customized units will not fit into the standard SoundScreamer case, and Arthrodax must decide what to do about acquiring cases for the customized units as it decides whether to accept Ranger's purchase offer.

An appropriate case can be purchased at $500 per case, but Arthrodax could instead purchase an injection molder to make the cases. It will cost $20,000 to purchase the molder, and there is a 0.6 probability that it will be possible to successfully make the cases using the molder. If the molder does not work, then the purchase price for the molder will be totally lost and Arthrodax must still purchase the cases at $500 per case. If the molder works, then it will cost $60 per case to make the cases using the molder. Regardless of which case is used, the cost of assembling the SoundScreamer circuit boards into the case is $20 per unit. Unfortunately, there is no way to test the molder without purchasing it. Assume that there is no other use for the molder except to make the cases for the Ranger order.

1. Draw a decision tree for Arthrodax's decision about whether to accept the Ranger order and how to acquire the cases for the customized SoundScreamers.

2. Using expected net profit as the decision criterion, determine the preferred course of action for Arthrodax.

Reference no: EM132260466

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