There are couple of responses posted below . Please read both of them and give your opinion on them separately.

Read Response-1 and Response-2 below and give your opinion on BOTH responses separately. your answer should be supported with research unless the question is opinion oriented.. Responses to discussions below should not be “I agree” or “I like the way you stated that.” These responses should again be insightful, offering an opinion or facts based on your research and experiences. The opinion to both responses should be a minimum of 200 words each . See APA criteria for citing resources.

The below responses are of individuals who did case study “Teloxy Engineering (A)” on page 948 and answer the corresponding questions on the same page.

“text book attached “

Response-1

1. Using expected value, is it economically better to make or buy the component?

Project cost estimation plays a key role for the success of any business. The organization that has the potential to estimate realistic price or have a good budget scheme for manufacturing a certain product can stand still for a long period without any hurdles. In our case study, the Teloxy engineering firm were able to get hold of a good contract in designing 10,000 units of a new product the company has never worked on. According to the management cost estimation for finishing up the end product in producing those units was around $650,000 that includes a small component that would be purchased from an outside market.

While the research team involved in manufacturing the product were not happy with the component that was about to be part of the product and requested for a higher-grade component. So the new cost for buying a higher-grade component would tamper the budget of the project. After certain consideration the management came up with a new idea of producing its own component instead of buying it from an outside market. Well it’s a great idea to manufacture your own products that would gradually make good profits as the product cost in manufacturing it would be very low compared to what has been budgeted (buying external parts to finish the product). But an intriguing fact is that the Teloxy engineering has never worked on a project of this scale. Moreover, any small mistake in the design would cost them a great fortune and can tarnish their reputation within the market as well as the customers. The fact about this circumstance is that any manufacturing defects would cost them around $120 per piece; which can be overlooked, if Teloxy engineering has taken up any big projects like this in the past. As experience in dealing with product manufacturing of this size would have given an insight in approaching this problem and solve accordingly without any loss.

Cost estimate to buy the higher-grade component:

Price per unit = $72, Number of units to manufacture = 10,000

Total cost = 10,000 * 72 = $720,000

Cost estimate to produce the higher-grade component:

Price per unit = $40, Set up cost = $100,000, Number of units to manufacture = 10,000

Repair cost per piece = $120

Raw material cost => 10,000 * 40 = $400,000,

Defects ratio => 0*0.10 + 1000*0.20 + 2000*0.30 + 3000*0.25 +4000*0.15 = 2150

Repair Cost => 2150 * 120 = $258,000

Overall estimate => $258,000 + $400,000 + $100,000 = $758,000 ($38,000 more compared to the increased cost of purchasing higher-grade component)

In my opinion, the most economical option would be to better buy the component directly from the external market instead of manufacturing their own. As this contract is a one-timer and any lack in product quality would account for a great risk to the organization itself. A prior experience in manufacturing these products would have helped a lot in designing a low-cost estimation which is lacked by the organization, so it’s better to take a price dip instead of losing the company reputation.

2. Strategically thinking, why might management opt for other than the most economical choice?

Looking at the above statistical analysis, it is evident that manufacturing a branch new product of such scale with no industry experience would leave a bad mark on the organization. Moreover, the organization has to think about the resources, cost and time invested to produce such quantity. The external market product in question has already been given a green check by the research team as they were the ones who proposed this idea to include it to produce an excellent product. That might be one of the reasons for the management to think about this best option for this contract compared to an economical one.

Response-2

1. Using expected value, is it economically better to make or buy the component?

10,000 units of a new products

$60 per unit per ingredient

Total budget is $650,000

total cost to build = $60 * 10,000 = $600,000

Income = +$50,000………………………(I)

With higher-grade component

$72 per unit per ingredient

total budget is $650,000

total cost to build = $72 * 10,000 = $720,000

Income = -$72,000……………………..(II)

In case of manufacturing-

Since Teloxy Engineering has never manufactured this product before, so all defective parts must be removed and repaired at a cost of $120 per part.

possible defects = (0*0.10) + (1000*0.20) + (2000*0.30) + (3000*0.25) + (4000*0.15) = 2150 units

Cost to repaired units: $120 * 2150 = $258,000

10,000 units can be produced with setup costs $100,000 and $40 per component

Manufacturing cost = $100,000 + ($40 * 10,000) = $500,000

Total cost including defect repair = $500,000 + $258,000 = $758,000

Income = -$108,000……………………..(III)

If we consider I, II and III, we can examine the profit and loss while purchasing the product Vs buying it. In (I), Teloxy Engineering is getting a profit of $50,000 if they purchase the product without any upgrade. With upgrade as mentioned in (II), they get a loss of $72,000 with at least their product will be of high quality with upgrade. But if they try to manufacture the product, there is a chance of losing approx $108,000. So it would be a better idea to buy the component rather than manufacturing it.

2. Strategically thinking, why might management opt for other than the most economical choice?

If management thinks of manufacturing the product, then initially it may led to some over-budget because of defects and buying raw materials etc. But for a long run, it can led to profit as the number of defects are going to decrease as they get some experience in manufacturing the product. Moreover, they do not have to rely on purchasing the product every time as they won’t get the same price and the price might increase in the future. Setting up manufacturing is a better idea for a long run and if the company is not thinking of present economical profit then they should go for manufacturing the product rather than buying it.

References –

1. Kerzner, H. (2017). Project Management A Systems Approach to Planning, Scheduling and Controlling.