Reference no: EM132216017

Wildcats Inc. is a cell phone manufacturer serving the Asian and North American markets. The current annual demand for its product in Asia is 2 million, whereas the demand in North America is 4 million. Over the next two years (i.e., Year 1 and Year 2), demand in Asia is expected to go up either by 50 percent, with a probability of 0.7, or by 20 percent, with a probability of 0.3. Over the same period, demand in North America is expected to go up by 10 percent, with a probability of 0.5, or go down 10 percent, with a probability of 0.5. Wildcats currently has a production facility in Asia with a capacity of 2.4 million units per year and a facility in North America with a capacity of 4.2 million per year. The variable production cost per phone in Asia is $15, and the variable cost per phone in North America is $17. It costs $3 to ship a phone between the two markets. Each phone sells for $40 in both markets.

Wildcats will use a decision tree analysis to determine whether to add 2 million units ("Large Addition") or 1.5 million units ("Small Addition") of capacity to the Asia plant. The larger plant increase will cost $18 million, whereas the smaller addition will cost $15 million. Assume that Wildcats uses a discount factor of 10 percent.

Q1. What is the probability that the Asian Market demand increases by 50% in Year 1 AND by 20% in Year 2?

0.09

0.21

0.25

0.49