FInance-Determining Production Capacity Needed at Toyota Motor

| January 30, 2017

Question
Question 1: Determining Production Capacity Needed at Toyota Motor Manufacturing of
Canada (TMMC)
Decision trees are another important if challenging world-class operations management method
which operations managers should understand and with which other managers should be
familiar.
This exercise illustrates how using a decision tree, determination of an "optimal" production
capacity option can be made from among several possible capacity options based on the provided
probable market demand and expected costs/payoffs of events that influence the options.
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 has provided three vehicle estimated demand scenarios with associated probabilities
as follows:
Demand
Low
Moderate
High

2003
10,000
15,000
20,000

2004
10,500
16,000
24,000

2005
11,000
17,000
26,000

2006
11,500
18,000
28,000

2007
12,000
19,000
30,000

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.
Please provide detail explanation. When you answer the question please read through each
questions.

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