Reference no: EM133002360
Question - Saints Manufacturing Company sees a market need for a new machined bearing. They have created a market forecast of 300,000 bearings per year. The more time that they invest in value engineering and design, the less the variable cost will be per unit. Their research and development manager has come up with the following three strategies:
Strategy A - This strategy has the least amount of value engineering, as it is possible his best engineers will not be available to work on the project. The fixed investment cost for engineering for this strategy is $40,000. He is unsure of the variable costs exactly, but has reviewed some preliminary data and believes that the variable cost will follow these probabilities: 0.3 probability of a variable cost of $0.50 each, 0.3 of $0.52, and 0.4 of $0.55
Strategy B - This strategy has a middle of the road amount of value engineering, using his staff engineers. The fixed investment cost for engineering for this strategy is $52,000. He believes that the variable cost will follow these probabilities: 0.3 probability of a variable cost of $0.48 each, 0.3 of $0.50, and 0.4 of $0.53
Strategy C - This strategy has the most amount of value engineering, using an outside engineering firm that is very experienced in bearing design. The fixed investment cost for engineering for this strategy is $60,000. He believes that the variable cost will follow these probabilities: 0.3 probability of a variable cost of $0.45 each, 0.3 of $0.47, and 0.4 of $0.49
What is the expected cost of each strategy? Which strategy should he choose? (Note: this is an EMV problem).
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