TELOXY ENGINEERING (B) Your manufacturing team informs you that they have found

Question

TELOXY ENGINEERING (B) Your manufacturing team informs you that they have found a way to increase the size of the manufacturing run from 10,000 to 18,000 units in increments of 2000 units. However, the setup cost will be $150,000 rather than $100,000 for all production runs greater than 10,000 units and defects will cost the same $120 for removal and repair. I. Calculate the economie feasibility of make or buy 2. Should the probability of defects change if we produce 18,000 units as opposed to 10,000 units? . Would your answer to question 1 change if Teloxy management believes that follow on contracts will be forthcoming? What would happen if the probability of defects changes to 15 percent, 25 percent, 40 percent, 15 percent, and 5 percent due to carning-cuve cfficicncICS

Explanation / Answer

1) cost of production = $(100000+40*10000)

cost/parts = total cost/10000 = $50

Now, considering defects parts cost

since each defective parts needs to be replaced with cost of $120

so, total cost = 228000

adding this to cost of production, we get

Production cost/parts= 728000/10000= $72.8

Market value /parts = $72

Thus its economically better to buy the component

B)

1)economic feasibility depends upon the return on investment(roi) which is given by

ROI = Present Value Of Benefits / Present Value Of Costs

if the roi is higher,more the process is economical feasible and vice versa

i think in this case it is not economically feasible because the value of cost is higher than the benefits range

2)yes the probability of defects will change as it depends upon the number of products.so as it increases the probabilty increases.

3)yes the economic feasibility could change ina positive way if the contract goes bigger as their is more chance of getting higher rate of return on each component.so it will change.

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