Option #1: Make or Buy

The calculation part of the question requires only addition and multiplication. Start by reading the scenario and then answer the questions below.

Scenario:

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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                40Probability 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 your answers in the Excel file.
  • For the written essay section, submit a paper that is 2-3 pages long. Include a minimum of two scholarly references, in addition to any course textbooks or lecture material you decide to use. The CSU-Global Library is a good place to find these sources. Format your entire paper according to the CSU-Global Guide to Writing & APA (Links to an external site.). You will also find an APA template for writing a paper on the Library site.

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