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

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Answer

1) cost of production = $(100000+40*10000) cost/parts = total cost/10000 = $50 Now, considering defects parts cost since each defective parts needs to be replaced with cost of $120 so, total cost = 228000 adding this to cost of production, we get Production cost/parts= 728000/10000= $72.8 Market value /parts = $72 Thus its economically better to buy the component B) 1)economic feasibility depends upon the return on investment(roi) which is given by ROI = Present Value Of Benefits / Present Value Of Costs if the roi is higher,more the process is economical feasible and vice versa i think in this case it is not economically feasible because the value of cost is higher than the benefits range 2)yes the probability of defects will change as it depends upon the number of products.so as it increases the probabilty increases. 3)yes the economic feasibility could change ina positive way if the contract goes bigger as their is more chance of getting higher rate of return on each component.so it will change.

A 1) economically speaking it is better to make the component because of the cost of component can be decided by the management itself as they can use cheao material to maintain their budget. 2)strategically speaking management should go for this contract and buy the component beacuse they are new to thi product and want to make their mark in the industry so they cant take risk..so they should keep risk management in their mind.
B1)economic feasibility depends upon the return on investment(roi) which is given by ROI = Present Value Of Benefits / Present Value Of Costs
if the roi is higher,more the process is economical feasible and vice versa i think in this case it is not economically feasible because the value of cost is higher than the benefits range 2)yes the probability of defects will change as it depends upon the number of products.so as it increases the probabilty increases. 3)yes the economic feasibility could change ina positive way if the contract goes bigger as their is more chance of getting higher rate of return on each component.so it will change.

A. 1) cost of production = $(100000+40*10000) cost/parts = total cost/10000 = $50 Now, considering defects parts cost since each defective parts needs to be replaced with cost of $120 so, total cost = 228000 adding this to cost of production, we get Production cost/parts= 728000/10000= $72.8 Market value /parts = $72 Thus its economically better to buy the component


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