CHAPTER 8
DECISION ANALYSIS
Internet Case Study: Toledo Leather Company
1.
Profit Calculations with Semi-Automated Machine (Machine 1)
Capacity = 5 days per week × 50 weeks per year × [640 × 7/8] = 140,000 per year.
Sales price = $6 per unit.
Cost per case (without overtime) = Material cost + Variable cost = $1.50 + $2.50 = $4.
160,000 (Modify) ($6 – $4) × 160,000 – $15,000 = $305,000
Profit Calculations with Automated Machine (Machine 2)
Capacity = 5 days per week × 50 weeks per year × [800 × 3/4] = 150,000 per year.
Sales price = $6 per unit.
Cost per case (without overtime) = Material cost + Variable cost = $1.50 + $1.75 = $3.25.
See file Ch08 Internet Case Toledo Leather.XLS for the TreePlan solution.
Expected value of using semi-automated machine is $271,450, with a cost of $250,000. The net profit is
therefore $21,450.
Expected value of using automated machine is $376,300, with a cost of $350,000. The net profit is
therefore $26,300.
2.
Outcomes (Sales Volumes)
Alternative
120,000 units
130,000 units
140,000 units
160,000 units
Semi-automated
$240,000
$260,000
$280,000
$296,000
Automated
$330,000
$357,500
$385,000
$431,000
(a) Maximax criterion: