Question

Ritz​ Products'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 ​$11 ​million, with a probability of 0.40 that the product will be satisfactory and a 0.60 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 ​$11 million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.60. If the second make decision also​ fails, the firm must purchase. Regardless of when the purchase takes​ place, Dhakar's best judgment of cost is that Ritz will pay ​$0.60 for each purchased semiconductor plus ​$22 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?

The firm should (bur or make)  the semiconductors because this decision has an expected cost of $_______? (Enter your response as an integer​.)

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

In this case, expected monetary value is represented by ______. To make the decision in part a) we found the (min or max) of these values.

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

The worst that can happen is that the firm spends $________? The best that can happen is that the firm spends $________?

I really need this problem to be explained out to how to get these answers.

Thanks!

Answer 1

Cost of buying decision = 0.6 x 1M+22M = 22.6M

Cost of making decision

= 0.6 [(22.6x0.4)+11)] +11

= 23.024M

(a) The best decision is to buy the product from outside as it has lower total cost of 22.6M against 23.024M when produced.

(b) EMV of buying is 22.6M

(c) The worst that can happen is that the project fails twice and the product is to be procured from outside at a total cost of 23.024M

The best which can happen is the success in the first attempt which has a total cost of 11M