Problem 1:
ShamuLink want to expand their business and improve their sales and profits. Instead of building manufacturing plants and installing new machineries, companies look to buy other companies and integrate them into their current business. One of the recent purchase was SATI's acquisition of MyK to expand their power business. The following is a scaled down version of the decision process that goes into before buying another company. Business A is a major player in the energy industry and wants to expand their business by buying out Business B. Business B has the right characteristics and could be bargained for $22 million dollars. There are couples of other firms also keeping their eyes on Business B and when exactly Business B need to make a move could cost or save a good amount of money. The experts in Business A feel that if they If they wait for one month, there is a 30% chance the price could be reduced by $600,000 and a 20% chance it could be reduced by $1,200,000. There is a 50% chance the price may not go down at all. If Business B is available for purchase after 1 month, the following situations can be predicted.
a. If the price did not drop in month 1, there is a 60% chance of a $600,000 price reduction in month 2 and a 10% chance of $1,200,000 reduction in month 2 and a 30% chance of no price reduction in month 2.
b. If the price dropped by $600,000 in month 1, there is a 20% chance of a $300,000 price reduction in month 2 and a 20% chance of $600,000 reduction in month 2 and a 60% chance of no further price reduction in month 2.
c. If the price dropped by $1,200,000 in month 1, there is a 20% chance of a $200,000 price reduction in month 2 and a 10% chance of $400,000 reduction in month 2 and a 70% chance of no further price reduction in month 2.
If Business A bought Business B, they believe they could gross $30 million dollars in sales (Purchase of the company is not included). They have $22 million dollars in hand and their investment normally returns between 18 to 20%. What should Business A do and when?
Problem 2:
Provide Response in Precision Tree/Excel Format.
Arthrodax Company has been approached by Ranger Sound with a rush order offer to purchase 100 units of a customized version of Arthrodax's Sound Screamer audio mixer at $5,000 per unit, and Arthrodax needs to decide how to respond. The electronic modifications of the standard Sound Screamer needed for this customized version are straightforward, but there will be a fixed cost of $100,000 to design the modifications and set up for assembly of the customized Sound Screamers, regardless of the number of units produced. It will cost $2,000 per unit to manufacture the circuit boards for the units. Since Arthrodax has some short term spare manufacturing capacity, the Ranger offer is potentially attractive. However, the circuit boards for the customized units will not fit into the standard Sound Screamer case, and Arthrodax must decide what to do about acquiring cases for the customized units as it decides whether to accept Ranger's purchase offer. An appropriate case can be purchased at $500 per case, but Arthrodax could instead purchase an injection molder to make the cases. It will cost $20,000 to purchase the molder, and there is a 0.6 probability that it will be possible to successfully make the cases using the molder. If the molder does not work, then the purchase price for the molder will be totally lost and Arthrodax must still purchase the cases at $500 per case. If the molder works, then it will cost $60 per case to make the cases using the molder. Regardless of which case is used, the cost of assembling the SoundScreamer circuit boards into the case is $20 per unit. Unfortunately, there is no way to test the molder without purchasing it. Assume that there is no other use for the molder except to make the cases for the Ranger
(i) Draw a decision tree for Arthrodax's decision about whether to accept the Ranger offer and how to acquire the cases for the customized Sound Screamers.
(ii) Using expected net profit as the decision criterion, determine the preferred course of action for Arthrodax.
(iii) Use the Influence Diagram on at least one of the problems above and decision on the other.
Second part:
Ranger Sound is not sure of their order of 100 units. Based on the market research they think there is only a 35% chance they require 100 units and a 65% chance they only need 50 units. If they only order 50 units they are willing to pay $6000 per unit and for an order of 100, they will pay $5000 a unit. Because of the timing, the decision to buy the plastic bracket or purchasing the molding unit and produce the bracket in-house cannot wait for the number of orders. However the fixed and the variable costs do not change with the order size.