Ritz Products’s materials manager, Tej Dhakar,must determine whether to make or buy a new semiconduc-tor for the wrist TV that the firm is about to produce. Onemillion units are expected to be produced over the life cycle.If the product is made, start-up and production costs of themake decision total $1 million, with a probability of .4 thatthe product will be satisfactory and a .6 probability that itwill not. If the product is not satisfactory, the firm will haveto reevaluate the decision. If the decision is reevaluated, thechoice will be whether to spend another $1 million to redesignthe semiconductor or to purchase. Likelihood of success thesecond time that the make decision is made is .9. If the secondmake decision also fails, the firm must purchase. Regardlessof when the purchase takes place, Dhakar’s best judgment ofcost is that Ritz will pay $.50 for each purchased semiconduc-tor plus $1 million in vendor development cost.a) Assuming that Ritz must have the semiconductor (stop-ping or doing without is not a viable option), what is thebest decision?b) What criteria did you use to make this decision?c) What is the worst that can happen to Ritz as a result of thisparticular decision? What is the best that can happen?
Ritz
must determine whether to make or buy a new semiconduc-
tor 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 $1 million, with a probability of .4 that
the product will be satisfactory and a .6 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 $1 million to redesign
the semiconductor or to purchase. Likelihood of success the
second time that the make decision is made is .9. 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 $.50 for each purchased semiconduc-
tor plus $1 million in vendor development cost.
a) Assuming that Ritz must have the semiconductor (stop-
ping or doing without is not a viable option), what is the
best decision?
b) What criteria did you use to make this decision?
c) What is the worst that can happen to Ritz as a result of this
particular decision? What is the best that can happen?
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