Determining Production Capacity Needed at Toyota Motor Manufacturing of Canada (TMMC) Use of a decision tree in Exercise 3 is required. Decision trees are another important tool which operations managers use. Their use directly supports Decision Making, one of the UMUC MBA Competencies. This exercise illustrates how determination of an “optimal” production capacity option can be made from among several possible capacity options based on the provided probable market demand and the expected costs/payoffs of events that influence the options. Sample numbers follow here. Your section professor may modify these numbers in the specific Exercise 3 that she or he assigns to you in your section. It is spring 2000, and TMMC has indeed just been chosen to produce the new Lexus RX 330 line, with the first units deliverable in 2003. Toyota must now determine the amount of annual production capacity it should build at TMMC. Toyota’s goal is to maximize the profit from the RX 330 line over the five years from 2003-2007. These vehicles will sell for an average of $37,000 and incur a mean unit production cost of $28,000 (here, $ = the Canadian dollar). 10,000 units of annual production capacity can be built for $50M (M=million) with additional blocks of 5,000 units of annual capacity each costing $15M. Each block of 5,000 units of capacity will also cost $5M per year to maintain, even if the capacity is unused. Assume that the number of units actually sold each year will be the lesser of the demand and the production capacity. Marketing – about which you will learn more in AMBA 650 – has provided three vehicle estimated demand scenarios with associated probabilities as follows: Probability 0.25 0.50 0.25 a. To maximize profit earned during this period, which production capacity should TMMC in 2000 decide to build – 10,000, 15,000, 20,000, 25,000, or 30,000 cars?Justify your choice using a decision tree. b. What are the weaknesses or limitations in this analysis? c. It is now 2010. How well has the RX-330/350 actually done in the North American market? Further, is its quality rated as high – or higher – as if it were made in Japan?
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