Answered: Assuming that Ritz must have the…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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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.

Three

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

million, with a probability of

0.5

that the product will be satisfactory and a

0.5

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

million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is

0.8.

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

$0.40

for each purchased semiconductor plus

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?

Now, find the expected cost of the first attempt. To do so, multiply the cost of each outcome by its corresponding probability and then sum these values. Recall that if the first attempt is good, the cost is

$3 million

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