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A manufacturing company currently employs 50 workers. It takes a worker an hour to make a...

A manufacturing company currently employs 50 workers. It takes a worker an hour to make a unit and workers are paid $20/hour. The material cost is $5/unit. Each worker works 160 hours/week to meet the current monthly demand of 8,000 units. Due to the change of economy, the manufacturing company predicted that the demand has 60% chance of increasing 50% from the previous month and 40% chance of remaining the same for the next three months. The company is considering two options: hiring additional workers at a $1,000 fixed cost (administration and benefit) per month in addition to the hourly labor cost. The company can possibly use subcontracting from a plant China. The cost of subcontracting is 180/unit ($1=6) including material cost. In addition, the exchange rate yuan can go up (the value of yuan increases) by 20% with 80% of change or go down (the value of yuan decreases) by 10% with 20% of chance for the next three months. The yearly discount rate is 12% which means 1% per month. Assume all costs re incurred at the beginning of the period. For example, if the demand for next month is higher, the cost of either hiring additional worker of subcontracting should happen at the current time.

A) Please help this company draw the decision tree clearly.

B) Which option is better.

Expert Solution

There are 50 workers in the company

Each worker requires an hour to make a unit

Each worker works 160 hours a week . Thus in a week 50 workers will produce the following:

50 * 160 = 8000 units

Change in economy has brought about the following changes:

Probability Demand Final Demand

.60 8000*1.5 = 12000 12000*.6 = 7200

.40 8000 8000* .4 = 3200

Total Demand 10400 units

Two Options

A. Hiring additional workers @ 1000 Rs per month i.e. the weeks demand

Thus Cost required to meet up the same:

Material cost 52000

10400 units @ 5 per unit

Labour cost 160000

50 workers * 160 hours * 20 per hour

Fixed Cost for additional worker

excess demand 2200 units/160 unit per worker

14 employees * 1000 14000

Total Cost required : 52000+160000+14000 = 2,26,000 $.

B.Subcontracting cost

For 2200 units

Subcontracting cost will be 2200 units * 180 yuan = 396000 yuan

Exchange rate = 1 $= 6 yuan

Future value:

Probability Yuan Price Final Yuan Price

.80 6*.8= 4.8 3.84

.20 6 * 1.1=6.6 1.32

Total 5.16

Thus 1 $ = 5.16 Yuan

396000/5.16 = 76,750 $

Interest @ 1 % = 767 $

Material Cost 40000 $

8000*5

Labour cost 160000 $

Total 277,517 $

Thus Option A is better because it is cheaper

jeff jeffy answered 1 year ago

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