A company that makes gourmet snack foods is considering upgrading or repairing its
major production machine. The company currently operates in market conditions where sales of
100,000 units are realised.
If it buys a new machine (upgrades) at a cost of $200,000.00, the new equipment will make items
faster so that the Company would be able to manufacture up to 500,000 units using labour and material
inputs of just $1.00 per unit. If the company manufactures less than 200,000 units on the machine,
labour and material inputs cost considerably more, at $1.25 per unit.
If the company chooses to repair the machine at a cost of $100,000.00 they would make a maximum of
100,000 units, and use labour and material inputs at a cost of $1.25 per unit.
Alternatively the company can choose to do nothing:
Growth of the market has a relatively good outlook, with the following estimates having been
estimated by the national manufacturers’ association:
? Probability of market growth = 40%
? Probability of market being unchanged = 50%
? Probability of market decline = 10%
If there is market growth, the company will be able to sell as many as 500,000 units. On the other
hand, if there is market decline, the company can only expect to sell 50,000 units.
Regardless of the decision made by the company, sales unit prices would remain the same. Sales would
be $2.00 per unit in a declining or unchanged market, but if the market shows growth causing demand
to increase for the product, the company would increase its unit sales price to $2.50 per unit
(a) Draw a decision tree for the choices to be evaluated by the company (5 marks)
(b) Clearly show how you calculate the expected monetary values of each option. (10 marks)
(c) Use your findings to justify the course of action you recommend. (5 marks

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