Technotech Engineering has received a onetime contract to design and build10,000 units of a new product. During the proposal process, management felt thatthe new product could be designed and manufactured at a low cost. One of theingredients necessary to build the product was a small component that could bepurchased for $60 in the marketplace, including quantity discounts. Accordingly,management budgeted $650,000 for the purchasing and handling of 10,000components plus scrap.During the design stage, your engineering team informs you that the final designwill require a somewhat higher-grade component that sells for $72 with quantitydiscounts. The new price is substantially higher than you had budgeted for. Thiswill create a cost overrun.You meet with your manufacturing team to see if it can manufacture thecomponent at a cheaper price than buying it from the outside. Your manufacturingteam informs you that it can produce a maximum of 10,000 units, just enough tofulfill your contract. The setup cost will be $100,000 and the raw material cost is$40 per component. Since Technotech has never manufactured this product before,manufacturing expects the following defects:
% Defective 0 10 20 30 40probability of occurrence (%) 10 20 30 25 15All defective parts must be removed and repaired at a cost of $120 per part.
QUESTIONS1. Using expected value, is it economically better to make or buy the component? Explain itcompletely.2. Strategically thinking, why might management opt for other than the most economicalchoice? Explain it completely.
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