Reference no: EM133847475

Question: A manager must decide how many machines of a certain type to buy. The manager has narrowed the decision to two alternatives: (1) buy one machine or (2) buy two machines. If only one machine is purchased and demand is more than the company can handle, then a second machine will be purchased at a later date. However, the cost per machine would be lower if the two machines were to be purchased at the same time. The initial purchase of two machines has a net value of $75,000 if demand is low and $140,000 if demand is high. The probability of low demand is .45. The initial purchase of one machine has a net value of $85,000 if demand is low. If demand is high, and the company decides to purchase one machine initially, the manager has three options: The first option is to do nothing with a net value of $85,000. The second option is to subcontract. If the firm decides to subcontract, there is a 65 percent chance of using vendor X with a net return of $100,000. There is a 35 percent chance of using vendor Y with a net return of $135,000. The third option is to purchase a second machine with a net value of $115,000. How many machines should the firm purchase initially and why? Use a decision tree to analyze the problem (i.e. construct the tree diagram, include the probabilities and payoffs on the tree and solve for the decision strategy). Make sure to provide a managerial statement for the decision strategy. Get quick and affordable assignment help now!