PM Discussion 5

Rupesh Chandra Allakonda

Discussion 5

2 hours ago

 

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

Based on given information,

            Cost per component = $72

            Number of component buying = 10,000

            Total Cost = $72 * 10,000 = $7,20,000.

Hence, the total cost for buying 10,000 components is $7,20,000.

From the given information, calculation of the total cost if the component is manufacture can be calculated as below,

            Setup Cost = 100,000

            Raw Material Cost = $40 per unit

                                           = $40 * 10,000

                                           = $400,000

Total Defective Component = 2150 Components

Cost per repair = $120

            Total Repair Cost = $120 * 2150

                                         = $258,000.

Now, total cost for manufacturing 10,000 Components = Setup Cost + Raw Material Cost + Total          

                                                                                              Repair Cost

                                                                                           = 100,000 + 400,000 + 258,000

                                                                                           = $758,000.

From the above result, we can clearly see that buying components will be more cost effective then manufacturing it. Also, there will be saving of $38,000.00 ($758,000 - $720,000).

 

 

2. Strategically thinking, why might management opt for other than the most economical cost?

As Teloxy is manufacturing product for first time which indicates that they don’t have experience about the product manufacture field. Being in initial stage can results on the loss or more percentage of defect product. “One method employed by the company to ensure the entire company’s cooperation and involvement in the risk management process was to hold each manufacturing division responsible for any specific losses up to a designated self-insured retention level. If there was a significant loss, the division must absorb the loss and its impact on the division’s bottom-line profit margin. This directly involved the division in both loss preventions and claims management. When a claim did occur, the Risk Management Department maintained regular contact with the division’s personnel to establish protocol on the claim and cash reserves and ultimate disposition” (H., Kerzner). Also, Teloxy have to know about the present as well as long term objectives which are important for them to make more effective and gainful business venture in future. Strategically thinking, it’s better for company to buy rather then manufacturing the product.

 

Reference:

Project Management: A Systems Approach to planning, scheduling and controlling. By Harold R. Kerzner 11th Edition.