(solution) Moon Micro is a small manufacturer of servers that currently

(solution) Moon Micro is a small manufacturer of servers that currently

Moon Micro is a small manufacturer of servers that currently

builds its entire product in Santa Clara, California. As the

market for servers has grown dramatically, the Santa Clara

plant has reached capacity of 10,000 servers per year. Moon is

considering two options to increase its capacity. The first option

is to add 10,000 units of capacity to the Santa Clara plant at an

annualized fixed cost of $10,000,000 plus $500 labor per

server. The second option is to have Molectron, an independent

assembler, manufacture servers for Moon at a cost of $2,000 for

each server (excluding raw materials cost). Raw materials cost

$8,000 per server, and Moon sells each server for $15,000.

Moon must make this decision for a two-year time

horizon. During each year, demand for Moon servers has an

80 percent chance of increasing 50 percent from the year

before and a 20 percent chance of remaining the same as the

year before. Molectron?s prices may change as well. They are

fixed for the first year but have a 50 percent chance of increasing

20 percent in the second year and a 50 percent chance of

remaining where they are.

Use a decision tree to determine whether Moon should

add capacity to its Santa Clara plant or if it should outsource

to Molectron. What are some other factors that would affect

this decision that we have not discussed?