Another Item Producing Task I Need A Reply To The

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

From the case study given, I would suggest that it can be economically very good to produce the component instead of buying from the other industries and from any sellers.

First case: If the manufacturing team is producing the product and by looking at the information given by them to produce 10,000 units, the total cost to produce is:

Installation cost : $100,000.

No. of Units required : 10,000

Cost per units : $40

Total no of defects out of 10,000 units = 2150 units ((0% of 10,000) *0.1) +((10% of 10,000) *0.2) +((20% of 10,000) *0.3) +((30% of 10,000) *0.25) +((40% of 10,000) *0.15)

Cost to repair each defect : $120

Total cost spent of the defects : 2150*120 = $258,000.

The total cost for the production by the manufacturing team = $400,000+$100,000+$258,000 = $758,000.

Second case: If we consider the product being purchased outside:

The cost for each unit : $72

Handling charges : $50,000 (From the original estimate 650,000-600,000)

The total cost for the production of 10,000 units = $720,000+$50,000 = $770,000.

As per the calculations of both the cases above, I suggest the company to make the product as it is more sensible rather than purchasing it from outside.

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

The Management may decide on the choice of obtaining the item from the market as opposed to assembling it as there might be a larger number of misfortunes in the assembling procedure rather than buying it from the outside as it’s another item producing task. Another reason might be that the organization won’t have the capacity to deliver the sort of top-notch item requested by the client. The Firm management can decide to buy from an outsourcing source because of the lack of expertise in manufacturing and dealing the production by themselves.