Northern Lager Brewery (NLB), currendy buys 250 000 bottle labels every year from a local label-maker. The label-maker charges NLB £0.075 per piece. A demand forecast indicates that NLB's annual demand may grow up to 400 000 in the near future, so NLB is considering making the labels themselves.
If they did so, they would purchase a highquality colour photocopier that costs £6000 and lasts for five years with no salvage value at the end of its life. The operating cost of the photocopier would be £4900 per year, including the cost of colour cartridges and special paper used for labels. NLB would also have to hire a label designer. The cost of labour is estimated to be £0.04 per label produced.
On the basis of the following probabilistic estimate on the future demand, simulate 200 Alonte Carlo trials of the present worth of costs for
(a) continuing to purchase from the local label-maker and
(b) making its own labels. NLB's AIARR is 12%.
Make a recommendation as to whether NLB should consider making its own labels.
|
Demand
|
Probability
|
|
200,000
|
0.2
|
|
250,000
|
0.2
|
|
300,000
|
0.2
|
|
350,000
|
0.2
|
|
400,000
|
0.2
|