Spacely Sprockets (SS) makes sprockets surprise! SS can currently produce 1,000 sprockets at a...
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Spacely Sprockets (SS) makes sprockets surprise! SS can currently produce 1,000 sprockets at a cost of $6/sprocket. SS could produce an additional 2,000 sprockets at a cost of $5/sprocket, but it would need to invest in a new machine at a cost of $8,000. The machine has a life of 2,000 sprockets and no salvage value. Sprocket demand and price are highly variable: there is a 10% probability sprockets will sell for $2/sprocket, a 30% probability of $25/sprocket and a 60% probability of $8/sprocket. The sprockets will be sold in one year and for simplicity assume the discount rate is zero. What is the expected selling price of a sprocket? How many sprockets would SS choose to produce at this price and what is the expected profit at this level of sales? What is the expected profit of the project if you can wait to decide the production level until price and demand are know?
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