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University Of California, Irvine Operations And Supply Chain Management Assignment Help - the financial risks


Question - Your company has asked you to determine the financial risks of manufacturing 6,000 units of a
product rather than purchasing them from a vendor at $66.50 per unit. The production line will handle
exactly 6,000 units and requires a one-time setup cost of $50,000. The production cost is $60/unit.
Your manufacturing personnel inform you that some of the units may be defective, as shown below:
% defective 0 1 2 3 4
probability of 40 30 20 6 4
occurrence (%)
Defective items must be removed and replaced at a cost of $145/defective unit. However, 100 percent
of units purchased from vendors are defect-free. Construct a payoff table, and using the expected-
value model, determine the financial risk and whether the make or buy option is best.

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