Expected cost of production

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Reference no: EM13981240

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 sub- assemblies, such as the motor or the housing. Cost estimates in this case are as follows:

Alternative: Make Food Processor

Cost Per Unit ($) 35.00	Chance (%) 25
42.50	25
45.00	37
49.00	13

The company also could have the entire machine made by a subcontractor. The subcon- tractor, however, faces similar uncertainties regarding the costs and has provided Johnson Marketing with the following schedule of costs and chances:

Alternative: Buy Food Processor

Cost Per Unit ($) 37.00	Chance (%) 10
43.00	40
46,00	30
50.00	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 support your recommenda- tion. (Hint: Use care when interpreting the graph!)

Reference no: EM13981240

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