Chapter 6—Forever Young Solution

1. The decision tree for Forever Young is as follows:

D = 1,210
E = 7.16625
0.5 0.5

D = 1,210
0.5 0.5 E = 6.48375

0.5 0.5 D = 990

D = 1,100 E = 7.16625
E = 6.825
0.5 0.5 0.5 0.5
0.5 0.5 0.5 0.5 D = 990
E = 6.48375
D = 1,100 0.5 0.5
0.5 0.5
0.5 0.5
E = 6.175
0.5 0.5 D = 1,210
D = 1,000 E = 5.86625
0.5 0.5
E = 6.50 D = 900
0.5 0.5
E = 6.825 0.5 0.5
D = 990
0.5 0.5
E = 5.86625
0.5 0.5 D = 900 0.5 0.5
E = 6.175 D = 810
0.5 0.5 E = 7.16625
0.5 0.5

D = 810
E = 6.48375
0.5 0.5
D = 810
E = 5.86625

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 2. All details of the analysis are contained in the spreadsheet Chapter 6-Forever Young-Case
Solution. The NPV of expected profit for the onshoring and offshoring options are as follows:

Onshoring (see worksheet Onshoring)

If the company onshores production, the period 2 analysis is as follows (Given that production is
onshored it stays at $10 and is not affected by exchange rate fluctuations. Revenue stays at $20 per unit
for each period):

The period 1 analysis is as follows:

When discounted to the present, the onshoring discounted profits are $17,355.

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Offshoring (see worksheet Offshoring)

If production is offshored, the yuan exchange rate comes into play because costs are now incurred in
yuan. Revenue stays $20 per unit. Period 2 results are as follows (it is best for Forever Young to order
990 units for period 2):

Period 1 analysis is as follows (it is best for Forever Young to preorder 1100 units for period 1):

When discounted to the present, offshoring profits are $19,361.

It is better to offshore production if the choice is between onshoring and offshoring.

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 3. The analysis of the hybrid approach is as follows:

Hybrid Sourcing (see worksheet Hybrid Sourcing)

In this case, the strategy is to order a base load of 900 units from China for each period and make up any
difference from the onshore source (at $11 / unit). Period 2 results are as follows:

Period 1 analysis is as follows:

The discounted Period 0 results for the hybrid strategy results in profits of $19,331. Thus, the offshoring
option (with different order quantities for the two periods) is the best option unless the cost of
onshoring in the hybrid option can be reduced to $10.84 (set cell B4 in hybrid sourcing to 10.84).

If hybrid sourcing can be used with a base load order in period 2 of 810 (set cell B7 in hybrid sourcing to
810) and period 1 of 900, the expected profit increases to $19,350. In this case, the hybrid strategy is
more profitable if the onshoring cost for the hybrid option can be lowered to $10.95.

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