Ritz Product\'s materials manager, Tej Dhakar, must determine whether to make or

Question

Ritz Product's materials manager, Tej Dhakar, must determine whether to make or buy a new semiconductor for the wrist TV that the firm is about to produce. One million units are expected to be produced over the life cycle. If the product is made, start-up and production costs of the make decision total $1 million with a probability of 0.4 that the product will be satisfactory and a 0.6 probability that it will not. If the product is not satisfactory, the firm will have to reevaluate the decision. If the decision is reevaluated the choice will be whether to spend another $1 million to redesign the semiconductor or to purchase Likelihood of success the second time that the make decision is made is 0.9. If the second make decision also fails, the firm must purchase. Regardless of when the purchase takes place, Dhakars best judgement of cost is that Ritz will pay $0.50 for each purchased semiconductor plus $1 million in vendor development cost.

a) Assuming that ritz must have the semiconductor (stopping or doing without is not a viable option) what is the best decision?

b) What criteria did you use to make this decision?

c) What is the worst that can happen to Ritz as a result of this particular decision? What is the best that can happen?

Explanation / Answer

solution :

Cost under different scenario

Best case (sucess in first attempt)

Sucess in 2nd attempt

worst case(failed to make)

Purchase

First time startup and production cost

1000000

1000000

1000000

2ND time startup and production cost

1000000

1000000

Purchase cost (1000000 + (1000000*.50)

1500000

1500000

Total cost

1000000

2000000

3500000

1500000

a) as shown above cost will be lower in making if and only if company get sucess in first attempt (i.e best case with only 0.40 probability) else it will end up incurring high making cost. Hence best decision is to purchase.

b) The criteria is that the probability of getting sucess in first attempt is lower than failing.

c) In worst case the making cost will be 3500000 and in best case cost of making will be only 1000000 as shown in table

Cost under different scenario

Best case (sucess in first attempt)

Sucess in 2nd attempt

worst case(failed to make)

Purchase

First time startup and production cost

1000000

1000000

1000000

2ND time startup and production cost

1000000

1000000

Purchase cost (1000000 + (1000000*.50)

1500000

1500000

Total cost

1000000

2000000

3500000

1500000

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