EMV using Decision Tree Analysis
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If Company A elects to buy a needed part, it would cost them $1.50 each. If they design and produce it themselves, it will result in a per unit cost of $0.75. However, the design investment would be $50,000. Further they realize that for this type of part, there is a 30% chance that after the part is designed and tested, the part will need to be redesigned at an additional cost of $50,000. Regardless of whether they make or buy the part, Company A will need 100,000 of these parts. What is the EMV using the Decision Trees Analysis and what do you think Company A should do?
1. Since the expected values represent cost, Company A should made their decision based on the lowest expected value.
2. The expected monetary value (cost) of making the part is $175,000.
3. The expected monetary value (cost) of buying the part is $135,000.
4.Company A should make the part and not buy it.
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Solution Summary
The solution gives out steps to take when doing a Make or Buy analysis
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Expeced Cost if buying the parts = $1.50 x 100,000 = $150,000
Expected Cost if ...
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- BE, Bangalore University, India
- MS, University of Wisconsin-Madison
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