Determine the financial risk

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Reference no: EM1361759

Your company has asked you to determine the financial risks of manufacturing 6,000 units of a product rather than purchasing them from a vendor at $66.50 per unit. The production line will handle exactly 6,000 units and requires a one-time setup cost of $50,000. The production cost is $60/unit.

Your manufacturing personnel inform you that some of the units may be defective, as shown below:

% defective | 0 1 2 3 4
------------------------------------------------------
Probability | 40 30 20 6 4
of
occurrence
(%)

Defective items must be removed and replaced at a cost of $145/defective unit. However,
100 percent of units purchased from vendors are defect-free.

Construct a payoff table, and using the expected-value model, determine the financial risk and whether the make or buy option is best.

Reference no: EM1361759

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