Diversitek D Was Approached By Ambassador Automobiles Aa For A Rush Order Of 100

Diversitek (D) was approached by Ambassador Automobiles (AA) for a rush order of 100 units of customized suspension systems (SS) at $5,000 per unit. Diversitek has to make the decision whether to accept this offer or reject the offer. The design of this suspension system is straight forward and would involve a fixed cost of $100,000 and a variable cost of $2000 per unit. Each suspension system is held together with a plastic bracket. There are two options to acquire the plastic bracket, either (1) purchasing plastic brackets directly or (2) buying a molding unit to manufacture plastic brackets. Regardless of which option to be chosen, there is an additional assembly charge of $20 per unit.

If Diversitek decides to choose the first option, each plastic bracket costs $500 per unit.

If Diversitek decides to choose the second option, it will cost $20,000 to buy the molding unit. Once the molding unit is purchased, each plastic bracket can be manufactured at $60 per piece. But there is no guarantee that this pro cess will work. The probability of this process success using the molding unit is 60%. Note that it is impossible to figure if this process will work. If this does not work, Diversitek has another choice to pay $500 per unit and purchase the bracket.

(1) Construct a decision tree to capture the above scenario. Note that your tree should include the following considerations if any.

Your resultant tree should have only THREE decision strategies that you can see their curves in the Cumulative Chart .

We use the negative sign ( – ) for the cost, the expenses, cash outflow, etc.

We use the positive sign (+) for the revenue, profit, cash inflow, etc.

(2) Generate the risk profile for the decision tree. The risk profile only includes the Cumulative Chart.

(3) Explain which optimal decision strategy should be chosen using the concepts of EMV and stochastic dominance. Submit your solution including the answers from (1) to (3).