Johnson Marketing is interested in producing and selling an innovative new food

Question

Johnson Marketing is interested in producing and selling an innovative new food processor. The decision they face is the typical "make or buy" decision often faced by manufacturers. On one hand, Johnson could produce the processor itself, subcontracting different subassemblies, such as the motor or the ho using. Cost estimates in this case are as follows: Alternative: Make Food Processor Cost per Unit $35.00 $42.50 $45.00 $49.00 Probability 25% 25% 37% 13% The company also could have the entire machine made by a subcon- tractor. The subcontractor, however, faces similar uncertainties regard- ing the costs and has provided Johnson Marketing with the following schedule of costs and probabilities: lternative: Buy Food Processor Cost per Unit S37.00 $43.00 $46.00 $50.00 Probability 10% 40% 30% 20% If Johnson Marketing wants to minimize its expected cost of production in this case, should it make or buy? Construct cumulative risk profiles to sup- port your recommendation. (Hint: Use care when interpreting the graph!)

Explanation / Answer

Expected cost per unit under Make option: 35*25%+42.50*25%+45*37%+49*13% =$42.40 Expected cost per unit under Buy option: 37*10%+43*40%+46*30%+50*20% =$44.70 So, as objective is to minimise cost of production so Making of Food Processor should be opted, as buying cost is higher to making.

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