Using expected value, is it economically better to make or buy the component?
1.Using expected value, is it economically better to make or buy the component?
Cost of buying 10,000 components = 10,000 * 72 = $720,000
2. Strategically thinking, why might management opt for other than the most economical choice?
response for Naresh Erlapalli
1. Using expected value, is it economically better to make or buy the component?
Estimated cost of purchase = 10000 * 72 = 72000
cost for production = setup cost + defective repair cost + total raw material cost
Given:
Cost of raw material per component = $40
Setup cost = $100,000
cost of defective repair per component = $120
Percent defective 0 10 20 30 40
Probability of 10 20 30 25 15
occurrence
No. Of defective units as probability = sum of ((percent defective/100) * (probability of occurrence/100) )* (total units) )
= (((0/100) * (10/100) ) + ((10/100) * (20/100) ) + ((20/100) * (30/100)) + ((30/100) * (25/100) + ((40/100) * (15/100) ) * (10000)
= 0.215 *10000
= 2150 Units
Total estimated repairing cost = total defective units * cost per repair = 2150*120 = $258,000
Total cost of raw materials = total units * cost per unit
= 10000 * 40
= $400,000
total cost of production for 10,000 units = $258,000 + $400,000 + 100,000
= $758,000
Estimated cost of purchasing = 10,000 *72 = $720,000
Therefore, comparing the prices for purchasing and manufacturing, it is economically better to manufacture the products.
2. Strategically thinking, why might management opt for other than the most economical choice?
The management may opt for manufacturing the product even though its costlier than purchasing the product because strategically thinking it gives them an opportunity to establish themselves in the market. By manufacturing the products in house they can look for long term solutions for future orders and they can also reduce the defective components by improving themselves and also it removes the dependency on external vendors which will make them more productive.
response for Tharun Varikoti
1. Using the expected value, is it economically better to make or buy the component?
Cost estimate with new high cost component:
$72x10,000=720,000
Another approach the management tried to take up was to build the component internally & setup:
Cost estimate if Teloxy builds it:
100,000+400,000= $500,000
Calculation after the defect:
0x10+0.1x20+0.2x30+0.3x25+0.4x15= 21.5 = 0.215
Total number of defective components for 10000 units=2150
Cost for defective component=$120
2150x120= $258,000
Thus, total cost If Teloxy builds it with the predicted defects= = 258,000 + 500,000 = $758,000
Coming to the difference if Teloxy builds it or buys it= 758,000-720,000 = $38,000.
Concluding to this calculation, economically it’s better for Teloxy to purchase it from the third-party vendor than building it.
2. Strategically thinking, why might the management opt for other than the most economical choice?
Utilizing the normal esteem, we see that it is financially savvy for the organization to make a segment than to get it. Be that as it may, now and again, the organization might opt to purchase the part
Despite the fact that it is increasingly costly as the organization is new to the assembling procedure and that there is an immense danger of disappointment or the harmed market esteem and the notoriety if there emerges a sudden hazard. Utilizing the normal esteem and the determined numbers above, we can see that last expense per unit is $75.8 if there should be an occurrence of make option and $77 in the event of purchasing the segment which is a less expense to the organization than the expense of building the market esteem and the notoriety once it is down a direct result of any looked for of disappointment. On the off chance that the organization thinks toward this path, then the organization might opt for purchasing the part despite the fact that it isn't practical.
References:
1. Kerzner, H. (2017). Project management: A Systems Approach to Planning, Scheduling, and Controlling (12 ed.). Hoboken, NJ, USA: John Wiley & Sons, Inc.
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