Lu Li
NetID: ll2937
HW #3 - TELOXY PART (A) - Answer Questions #1 and #2. 1. Using expected value, is it economically better to make or buy the component?
Expected percent of defective of all product:
Ex=0%*10%+10%*20%+20%*30%+30%*25%+40%*15%=21.5%
Buy: 72*10,000=720,000
Make: 100,000+40*10,000+120*10,000*21.5%=100,000+400,000+258,000=758,000
So it’s better to buy it. 2. Strategically thinking, why might management opt for other than the most economical choice?
Strategically thinking, if Teloxy decide to produce more new product, it’s a better chose to manufacture component in house. For several reasons, first, the cost of manufacture will lower than buy it when the amount of product more than 20,000 unit. Second, the experienced worker or management can reduce the percent of defective, which means less removed and repaired cost.
HW #3 - TELOXY PART (B) - Answer Questions #1, #2 and #3. 1. Calculate the economic feasibility of make or buy.
Ex=21.5%
12,000 units
Defective: 12000*21.5%=2580
So to produce 10000 unit product, only need repair 580 unit
Total cost: 150000+40*12000+120+580=699600
14,000unit
Defective: 14000*21.5%=3010
So to produce 10000unit product, did not need repair.
Total cost: 150000+40+14000+0=710000 2. Should the probability of defects change if we produce 18,000 units as opposed to 10,000 units?
In my personal opinion, the probability of defects should change. In real life, it is reasonable to believe that more experienced worker and better manager can reduce defects probability to some degree. 3. Would your answer to question 1 change if Teloxy management believes that follow on contracts will be forthcoming? What would happen if the probability of defects changes to 15 percent, 25 percent, 40 percent, 15 percent, and 5 percent due to learning-curve efficiencies?
No, my answer will not change. Because the cost should less than question 1 since the percentage should go down.
If the probability of defects change, the answer should different.
Ex=0%*15%+10%*25%+20%*40%+30%*15%+40%+5%=17%
10000 unit
Buy: 72*10000=720000
Make: 150000+40*10000+120*10000*17%=754000
12000 unit
Make: 150000+40*12000+120*12000*17%=634800
So making 12000 units is the most economical way for Teloxy. 