The Sunshine Manufacturing Company Has Developed a Unique New Product

question 27

Essay

The Sunshine Manufacturing Company has developed a unique new product and must now decide between two facility plans.The first alternative is to build a large new facility immediately.The second alternative is to build a small plant initially and to consider expanding it to a larger facility three years later if the market has proven favorable.
Marketing has provided the following probability estimates for a ten-year plan: $$\begin{array} { c c c } \hline \hline \text { First 3-Year Demand } & \text { Next 7-Year Demand } & \text { Frobability } \\\hline \text { Unfavorable } & \text { Unfavorable } & .2 \\\text { Unfavorable } & \text { Favorable } & .0 \\\text { Favorable } & \text { Favorable } & .7 \\\text { Favorable } & \text { Unfavorable } & .1 \\\hline \hline\end{array}$$ If the small plant is expanded,the probability of demands over the remaining seven years is 7/8 for favorable and 1/8 for unfavorable.The accounting department has provided the payoff for each outcome: $$\begin{array} { l c r } \hline \hline{ \text { Demand } } & \text { Facility Plan } & \text { Payoff } \\\hline \text { Favorable, favorable } & 1 & \$ 5,000,000 \\\text { Favorable, unfavorable } & 1 & 2,500,000 \\\text { Unfavorable, unfavorable } & 1 & 1,000,000 \\\text { Favorable, favorable } & \text { 2--expanded } & 4,000,000 \\\text { Favorable, unfavorable } & \text { 2-expanded } & 100,000 \\\text { Favorable, favorable } & \text { 2-not expanded } & 1,500,000 \\\text { Favorable, unfavorable } & \text { 2--not expanded } & 500,000 \\\text { Unfavorable, unfavorable } & \text { 2-not expanded } & 300,000 \\\hline \hline\end{array}$$ With these estimates,analyze Sunshine's facility decision and:
a. Perform a complete decision tree analysis.
b. Recommend a strategy to Sunshine.
c. Determine what payoffs will result from your recommendation.

---

Definitions:

Machine-Hours

A measure of production time, quantifying the hours a machine is operated in the manufacturing of a good.

Activity Rate

The activity rate is a cost accounting term that refers to the rate at which indirect costs are allocated to products or services based on specific activities.

Activity-Based Costing

An accounting method that assigns costs to products or services based on the activities and resources used in the production or delivery process.

Activity Rate

In cost accounting, it's the cost driver rate used in activity-based costing to assign indirect costs to products or services based on each activity's frequency and intensity.