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Week 2 Risk Management Project - BUYU Manufacturing




Question;BUYU Manufacturing has been contracted to provide SAEL;Electronics with printed circuit and motherboards (PC) boards under the;following terms;100,000 PC boards will be delivered to SAEL in one month.;In 3 months, SAEL has an option to take the delivery of an;additional 100,000 boards by giving BUYU a 30-day notice.;SAEL will pay $5 for each board it takes.;BUYU manufactures the PC boards through a process called;batching, and manufacturing costs are as follows;The manufacturing batch run has a fixed setup cost of;$250,000, regardless of the run size.;The marginal manufacturing cost is $2.00 per board;regardless of the size of the batch run.;BUYU must decide whether it should manufacture all 200,000;PC boards now, or if it should manufacture 100,000 now and the other 100,000;boards only if SAEL decides to buy them. If BUYU manufactures 200,000 now and;SAEL does not exercise its option, then BUYU will lose the manufacturing cost;of the extra 100,000 boards. BUYU believes that there is a 50% chance that SAEL;will exercise its option to buy the additional 100,000 PC boards.;Discuss the potential profit of manufacturing all 200,000;boards now.;Draw a decision tree for the decision that BUYU faces.;If BUYU uses its expected profit as the basis for its;decision, determine the preferred course of action.;Determine the range of values of the probability that SAEL;will exercise its option, making the decision found in part c as optimal, and;determine the expected value of perfect information about whether SAEL will;exercise its option.;Assume now that BUYU is constantly risk averse with a risk;tolerance of $100,000, and answer parts 3 and 4 again.


Paper#54650 | Written in 18-Jul-2015

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