Reference no: EM132310194

You work for Mango Computer Company that is considering a new product development project to develop a new tablet computer. As part of their planning process, the development team is considering whether or not to outsource the production of the screen. The estimated cost of the screen depends on the market demand of the new tablet that is uncertain at this time. If the market demand is high, the development team estimates that they can invest in special robotic equipment that will result in a reduced variable (unit) cost.

You have been asked to consider the problem of outsourcing the production of the screen. After considerable analysis, you have estimated the following unit costs as a function of future demand (low, average, or high) of the tablet computer and the probability estimates of future demand for the next five years.

a) Prepare a decision tree that describes the problem of deciding whether or not to outsource the production of the computer screen.

b) Based on your probability estimates of future demand, would you recommend outsourcing the production of the screen or producing it in-house? What is the expected cost associated with this decision?

c) A consultant has stated that she can forecast future demand with complete certainty. What is the maximum amount that you would pay her for this information? (Hint: Compare the expected cost in part (b) with the expected cost you would incur if you know each state of nature before deciding to produce in-house or outsource.)