Make or Buy

/in /by

Scenario:

You are the project manager on Project VIM, which is building a new printer, scanner, copier, and fax machine from various component parts. One of the component parts for the VIM product is currently available from a supplier for $115,000 for the 5,000 units you need. You took over for a prior project manager who only allocated $90,000 for this component. This means that you will exceed your project budget if you purchase the VIM component units from this supplier.

You reach out to your in-house manufacturing group and find that you can produce these 5,000 units in-house, within a time frame that fits the project timeline. The manufacturing group indicates that there is a one-time charge of $3,000 for setting up the production line. The material and labor cost will be $12 per unit if the firm manufactures the product in-house. You also learn that since this is a new set-up (which is using old equipment), the in-house manufacturing team estimates the following defects percentages, as well as the probability of those defects occurring:

Defect % 0 25 35 40
Probability of occurrence (%) 10 60 20 10

The replacement cost for defective components made in-house is $30 per defective unit.

Calculate the following (using the Excel Template linked below):

  • Total material costs
  • Expected number of defective units at each defect percentage (%)
  • Cost of replacing defective units at each defect percentage (%)
  • Material costs plus cost of replacing defective units at each defect percentage (%)
  • The probability of cost for the defect percentage (%) levels
  • Expected value of “making” components in-house

Address the following in a written essay:

  • Using the expected value, present your recommendation to make or buy the Project VIM component parts.
  • Will you need to issue a change request for additional money on your project? If so, for how much; and, if not, why not? What reasons do you think management might use to opt for the less economical choice?

Submission:

For the calculation section, complete the attached Excel template or a similar one. Post the answers in the Excel file.

For the essay submit a 2 single spaced pages including 2 peer reviewed reference and headings, introduction and conclusion where ever needed.