Question

A software company has just won a contract worth ¢80 million, if it delivers a successful product on time but only ¢40 million if it is late. It faces the problem now of whether to produce the work in house or to sub contract.

To sub contract the work would cost ¢50 million but the local subcontractor is so fast and reliable as to make it certain that successful software is produced on time. If the work is produced in house the cost would be only ¢20 million but based on past experience, would have only 90% chance of being successful. In the event of the software not being successful, there would be insufficient time to rewrite the whole package internally but there would still be the option of either a late rejection of the contract at a further cost of ¢10 million or a late sub-contracting the work on the same term as before. With this late start, the local subcontractor is estimated to have a 50/50 chance of producing it late. In this case, the subcontractor still has to be paid ¢50 million regardless of whether he meets the deadline or not.

Required                                                                                                              

Recommend the best course of action of the software company using tree diagram approach

(20 marks)

Answer 1

All the amounts are in ¢

The answer is inserted as a picture

th successful 20 = outsourced 0 - Decision node A (80-50-30)/2 of chance node a - End point (80-2 +60) H-rejectes alternative 53 901. late sejection (-20-10=+30) 10% 90%,x60 + 10%x Go) ting (80-20-50 =10) 53 unsuccesso Value = -10 50% outsource (40-20-5o = -30) loxsol + (-30)x50% tlo late completion Inhouse 58%. So, the value of the projeed will be $53. & The best Course of action is manufacture Inhouses in case the inhouse is unsuccessful choose outsoorcing CS th cam scannel

Given the local subcontractor has a chance of producing it late as 50/50 (it is taken as 50% chance of producing it late and 50% chance of producing it on time)