Morton Corporation manufactures computers and wants to select a supplier to purchase chips for its computers. There are two major suppliers of chips – AirBoxChips and SoftChips. AirBoxChips is a relatively big company and has a good reputation in terms of reliability and delivery. As it is a big company, it provides supply guarantee and sells its products with a higher price. Specifically, it charges $1.20 for each chip that it sells. SoftChips is small company having limited capacity. Even though it charges $0.90 for each chip that it sells, it does not provide supply guarantee. If it is a low-demand year, Softchips is able to satisfy Morton’s demand fully. However, if it is a high-demand year, it allocates only 90,000 chips for the purchase of Morton. If Morton cannot purhcase chips from its contracted supplier, it buys chips on the spot market. Spot market prices for chips are $2.00 per unit in a low-demand year and $4.00 per unit in a high-demand year. Demand in chips has a 75% chance of being high each of the next 2 years. Morton demanded 100,000 chips last year and predicts that its demand will be 110,000 chips this year. However, there is a 25% chance it will demand only 100,000 chips this year. Further, Morton expects that its demand will increase 20% over this year’s amount with a probability of 0.75 and decrease 10% over this year’s amount with a probability of 0.25. Morton must make a decision with a 2-year horizon and select only one supplier. Assuming a discount rate of 20% and all costs are incurred at the beginning of each year: a. Construct a decision tree. b. If Morton selects AirBoxChips for purchasing chips, what will be the net present value of total cost incurred? c. If Morton selects Softchips for purchasing chips, what will be the net present value of total cost incurred? d. Considering the total cost incurred only, which supplier should Morton select for purchasing chips?
Morton Corporation manufactures computers and wants to select a supplier to purchase chips for its computers. There are two major suppliers of chips – AirBoxChips and SoftChips.
AirBoxChips is a relatively big company and has a good reputation in terms of reliability and delivery. As it is a big company, it provides supply guarantee and sells its products with a higher price. Specifically, it charges $1.20 for each chip that it sells.
SoftChips is small company having limited capacity. Even though it charges $0.90 for each chip that it sells, it does not provide supply guarantee. If it is a low-demand year, Softchips is able to satisfy Morton’s demand fully. However, if it is a high-demand year, it allocates only 90,000 chips for the purchase of Morton.
If Morton cannot purhcase chips from its contracted supplier, it buys chips on the spot market. Spot market prices for chips are $2.00 per unit in a low-demand year and $4.00 per unit in a high-demand year.
Demand in chips has a 75% chance of being high each of the next 2 years. Morton demanded 100,000 chips last year and predicts that its demand will be 110,000 chips this year. However, there is a 25% chance it will demand only 100,000 chips this year. Further, Morton expects that its demand will increase 20% over this year’s amount with a probability of 0.75 and decrease 10% over this year’s amount with a probability of 0.25.
Morton must make a decision with a 2-year horizon and select only one supplier. Assuming a discount rate of 20% and all costs are incurred at the beginning of each year:
a. Construct a decision tree.
b. If Morton selects AirBoxChips for purchasing chips, what will be the
c. If Morton selects Softchips for purchasing chips, what will be the net present value of total cost incurred?
d. Considering the total cost incurred only, which supplier should Morton select for purchasing chips?
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