¶ … profit the company is likely to receive after selling all the 200,000 boards to SAEL. In addition, a decision tree for BUYU is drawn and BUYU's preferred course of action is discussed. The other aspect looked at in the paper is the expected value of perfect information about whether SAEL will exercise its option.
Profit for Manufacturing Boards
Total fixed costs is $250, 000
Marginal cost is $2per board = 2 x 200,000 boards = $400,000
Variable cost = sum of marginal costs of all units produced = $400,000
Total cost = variable costs + fixed costs
= 400,000 + 250,000 = 650,000
Contribution = sales -- variable costs
= (selling price x product units) -- variable costs
= (5 x 200,000) -- 400,000
= 1,000,000 -- 400,000 = 600,000
Contribution per unit = total contribution / product units
= 600,000 / 200,000 = 3
Breakeven = fixed costs / contribution per unit
= 250,000 / 3 = 83,333
83,333 is the number of products the company has to sell before earning any profit. The profit margin = sales -- breakeven = 200,000 -- 83,333 = 116,667. The profit is calculated by multiplying the remaining sales unit by the selling price = 116,667 x 5 = $583,335.
Decision Tree
Amount of sales
BUYU is also considering selling the half of the boards to the company then the reset be sold later. If the company sells all the 200,000 boards at ago, the profit will be $583,335 minus the production cost as well as other variable costs (Cha & Tappert, 2009). The marginal cost will be about $400,000 for the 200,000 boards regardless of how much is produced and used. The fixed cost will be $250,000 if the company's boards are 100,000; $500,000 if the boards are 200,000 in number and $125,000 if they are less than 100,000.
Use of Expected Profit
The expected profit of selling the 200,000 boards at ago is $583,335. If the company sells only 100,000 boards to SAEL, the expected profit would be $291,667.5. Thus, the expected profit when BUYU sells less than 100,000 boards to SAEL would be $145,833.75. Thus, the expected profit when the company sells all the boards would be 583,335. It appears that the owner's best option; profit maximizing option would be to manufacture and sell all…
