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Cbby1234

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

Ans:

CaseA:.Each part costs $72.00.

Organization needs 10,000 units.

So the total cost would be $720,000.00

CaseB:.As the cost is mentioned $50,000.00 and for the setup it is roughly costing around $100,000

Adding the material cost for 1 area is $40 and rough material cost is $400,000.00 for 10,000 units.

By calculating the cost of the deficient parts it averages around $2150.

Repairing 2150 deficient parts which leads to $258,000.00

So the total cost will be $758,000 adding all the above calculated results.

On comparing both cases instead of self-manufacturing, it is better to buy the finished product itself as it is economical and saves $38,000.

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

Ans:

Strategically thinking, Teloxy management believes that even though there are higher costs associated with it, the demand always remains constant for their product. So strategically it would be better to produce the parts on own, will not only help to get the product cheaper but the company have the scope to move to a manufacturing company that can develop and expand.Costs can also be brought down by their manufacturing unit reducing the number of defective components and gain efficiencies improving their learning curve. Risks taken and learning to produce the self-made goods lead to benefits, if not now, in the long run. Also, this would be a great practice for the Manufacturing team where Teloxy might see the defect probabilities very negligible in the long run there by presenting as a more economical choice.

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RESPONSE POST

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1) Using expected value, is it economically better to make or buy the component?
Ans:
Case A:.Each part costs $72.00.
Organization needs 10,000 units.
So the total cost would be $720,000.00
CaseB: As the cost is mentioned $50,000.00 and for the setup it is roughly costing around
$100,000
Adding the material cost for 1 area is $40 and rough material cost is $400,000.00 for 10,000
units.
By calculating the cost of the deficient parts it averages around $2150.
Repairing 2150 deficient parts which leads to $258,000.00
So the total cost will be $758,000 adding all the above calculated results.
On comparing both cases instead of self-manufacturing, it is better to buy the finished produc...


Anonymous
Excellent resource! Really helped me get the gist of things.

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