Marketing wants to minimize its expected cost of production

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Reference no: EM132280628

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

Alternative: Make Food Processor

Cost per Unit Probability

$35.00 - 25%

$42.50 - 25%

$45.00 - 37%

$49.00 - 13%

The company also could have the entire machine made by a subcontractor.

The subcontractor, however, faces similar uncertainties regarding the costs and has provided Johnson Marketing with the following schedule of costs and probabilities:

Alternative: Buy Food Processor

Cost per Unit Probability

$37.00 - 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 recommendation. (Hint: Use care when interpreting the graph)

Reference no: EM132280628

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