QuestionQuestion

A Northwest party products manufacturer has production facilities in Spokane, WA and Bangladesh. Both facilities have capacities of 1 million units each per year. The cost of production and distribution of party supplies from Spokane is $1/unit. The cost of production and distribution from Bangladesh is 60 Taka/unit. (Current exchange rate is $1=85 Taka). Over the next three years the exchange rate is expected to increase by 15% with a 0.5 probability and decrease by 5% with a probability of 0.5.

The expected demand this year is about 1.8 million units. Over the next three years the demand is expected to increase by 10% with a probability of 0.5 and decrease by 5% with a probability of 0.5. If demand is more than the capacity of the two plants then the remaining supplies are acquired from a competitor for $2/unit.

The company wants to increase the capacity of the Bangladesh plant by 500,000 units at a fixed cost of $1 million. The fixed cost will be incurred this year. Should They do it? Assume that the company uses a 10% discount rate.

This is a decision tree problem and need to know total profit for period 0.

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