Response5
1. Using expected value, is it economically better to make or buy the component?
By using the expect value, in my opinion better is to buy the components then make them. Below, I will explain why.
|
Material cost per unit |
40 |
40 |
40 |
40 |
40 |
|
Defective unit replacement |
120 |
120 |
120 |
120 |
120 |
|
Number of units |
10000 |
10000 |
10000 |
10000 |
10000 |
|
Defect % |
0% |
10% |
20% |
30% |
40% |
|
Probability of occurrence |
10% |
20% |
30% |
25% |
15% |
|
Total material cost |
$400000 |
$400000 |
$400000 |
$400000 |
$400000 |
|
One-time charge |
$100000 |
$100000 |
$100000 |
$100000 |
$100000 |
|
Number of defective units |
0 |
1000 |
2000 |
3000 |
4000 |
|
Cost of defective units |
0 |
$120000 |
$240000 |
$360000 |
$480000 |
|
Replacement cost of units |
$500000 |
$620000 |
$740000 |
$860000 |
$980000 |
|
Probability of the cost |
$50000 |
$124000 |
$222000 |
$215000 |
$147000 |
|
Expected value to manufacture: $758 000. |
The expected value is the total value of the probability of the cost to produce the components.
Expected value is $50000 + $124000+ $222000+$215000+$147000 = $758 000.
The cost of purchase guarantee to be without defects. The cost of purchase is 10 000 components for price $72, the total cost of purchase components is $720 000.
From the both values, we see that better is to purchase components then to produces the components. The diffrent in price is $758 000 - $720 000 = $38 000. In that case Toxy Engineering should buy the componetns insed of produce the componests.
2. Strategically thinking, why might management opt for other than the most economical choice?
Strategically thinking, better is to buy components then produce them. But in other words, if Teloxy management want to decide to produce the components with higher cost to make sure that in the future there might be dement for this type of the product and manufactory will decide not to produce this type of the product anymore, then it is better to pay some extra money and do in-house manufacture and produce this product themselves, then be dependent form a manufacture.