PM Discussion 5
tejaswinidon
TridarshD5.docx
Discussion 5
1 day ago
Teloxy engineering has got a project to design and produce 10,000 units of specific commodities. Every organization tries to provide a qualitative product that is cheap such that a maximum number of people utilize the product. And thus, the company or the organization will gain trust from its customers. For the present project received by Teloxy engineering, they are unable to decide whether they need to manufacture the items that are required for the preparation of the product or directly purchase from the external source (Kerzner, 2013). The cost of the product that is required for manufacturing in two different situations are as follows:
Situation-1: If the company will make the components that are necessary on their own, the cost per unit will be:
Set up cost = $100000
Cost of raw material for 10000 units = 40* 10000 = $400000
As the company is preparing the components for the first time, there may be defective components and they need to be repaired, the extra cost that is required to repair is as follows:
Total number of defective units = 0*0.1 + 1000*0.2 + 2000*0.3 + 3000*0.25 + 4000*0.15 = 2150 units.
Repair cost for defective units = 120*2150 = $258000
Thus the Total cost = set-up cost + cost of raw material + cost of repairs for defective units = 100000 + 400000 + 258000 = $ 758000.
Cost per unit = total cost / number of units = 758000/10000 = $ 75.8
Situation 2: if company purchases the component from the external resource:
If the high quality product is needed i.e., $ 72 , the handling cost can be calculated as follows:
Handling cost = 650000 – (60*10000) = $50000
Total cost = product cost + handling cost = (72*10000) + 50000 = $ 770000.
Cost per unit = total cost / number of units = 770000/10000 = $77.
From the two situations detailed above, situation 1 is preferable to situation 2. The cost per unit is less when the components required for developing the product is manufactured by the company is better than purchasing the components from others. If the company reduces the defects while manufacturing then the cost per unit product can be still reduced and make the product available to the customers at a cheaper price with good quality.
References
Kerzner, H. (2013). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. John Wiley & Sons.
