PM D5

Teloxy Engineering has received a one-time contract to design and build

10,000 units of a new product. During the proposal process, management

felt that the new product could be designed and manufactured at a low

cost. One of the ingredients necessary to build the product was a small

component that could be purchased for $60 in the marketplace, including

quantity discounts. Accordingly, management budgeted $650,000 for the

purchasing and handling of 10,000 components plus scrap.

During the design stage, your engineering team informs you that the final

design will require a somewhat higher-grade component that sells for $72

with quantity discounts. The new price is substantially higher than you

had budgeted for. This will create a cost overrun.

You meet with your manufacturing team to see if they can manufacture

the component at a cheaper price than buying it from the outside. Your

manufacturing team informs you that they can produce a maximum of

10,000 units, just enough to fulfill your contract. The setup cost will be

$100,000 and the raw material cost is $40 per component. Since Teloxy

has never manufactured this product before, manufacturing expects the

following defects:

All defective parts must be removed and repaired at a cost of $120 per

part.

1. Using expected value, is it economically better to make or buy the

component?

in a APA format and the required citation and references. with a minimum of 300 words.