Solved Example Attached

Ellisson Seafood Company ships fresh seafood to customers in the local area.  The logistics manager has developed 3 alternatives to ship the seafood. 

Part A 

#1 Each time a shipment is ready, call a common carrier.  While there is no fixed costs the variable cost per shipment is $750.

#2 Enter into a contract with a common carrier.  While the variable cost would be $300 per shipment, the fixed cost would be $5,000 per year.

#3 Lease their own refrigerated trucks.  The fixed cost would be $21,000 per year and the variable costs would be $50 per shipment.

Now Ellisson does not know what the number of shipment will be per year.  But a review of past years history provided the following information: 

Part B

Ellisson Seafood does not know how many shipments there will be per year.  However an analysis of the previous years’ data revealed the following: 

Demand

Shipments per year

Probability

Low

30

25%

Medium

50

60%

High

80

15%

Question:  Given the costs and probability, which option should Ellisson select?

A payout table and a decision tree are required for this assignment.

Hint:  Decision tree has 3 main branches each with 3 branches of their own.  The payout table will have  9 columns; Carrier options, # of shipments, cost per shipment, fixed annual cost, per shipment cost total per year, combined total costs, % probability, decision cost and final weighted costs.