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?