Moon Micro is a small manufacturer of servers that currentlybuilds 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 million 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 we have not
discussed that would affect this decision?