Discussion Response (150 words each)

Need responses to two discussions 150 words each. 

The Question file is attached. the two answers to which responses are needed are attached as well

TELOXY ENGINEERING (A)

Teloxy Engineering has received a one-time contract to design and build 10,000 units of a new
product. During the proposal process, management felt that the new product could be designed
and manufactured at a low cost. One of the ingredients necessary to build the product was a
small component that could be purchased for $60 in the marketplace, including quantity discounts. Accordingly, management budgeted $650,000 for the purchasing and handling of
10,000 components plus scrap.

During the design stage, your engineering team informs you that the final design will
require a somewhat higher-grade component that sells for $72 with quantity discounts. The new
price is substantially higher than you had budgeted for. This will create a cost overrun.

You meet with your manufacturing team to see if they can manufacture the component at
a cheaper price than buying it from the outside. Your manufacturing team informs you that they
can produce a maximum of 10,000 units, just enough to fulfill your contract. The setup cost will
be $100,000 and the raw material cost is $40 per component. Since Teloxy has never manufactured this product before, manufacturing expects the following defects:

Percent defective-             0   10 20 30 40
Probability of occurrence- 10 20 30 25 15

All defective parts must be removed and repaired at a cost of $120 per part.

Answer questions below (150 words per answer)
Q1. Using expected value, is it economically better to make or buy the component?
Q2. Strategically thinking, why might management opt for other than the most economical
choice?

Discussion – 5

Question 1:

Considering the expected value of repair costs and the cost of repairing components with the highest probability of defects, the calculations below display that manufacturing the component is more expensive than purchasing it which saves them additional money.

 Number of units =

((0/100) * (10/100) + (10/100) * (20/100) + (20/100) * (30/100) + (30/100) * (25/100) + (40/100) + (15/100)) * (10, 000) = 0.215 * 10000= 2150 units

Estimated cost of Repairing = 2150 * 120 = $258, 000

Cost (acquirement and getting) 10,000 fragments is = 10,000 x 72 = $720,000.00.

Cost (raw materials) = units * cost per unit = 10, 000 * 40= $400, 000

Cost of raw material/component = $40

Total cost incurred for production = $258, 000 + $400, 000 + 100, 000= $758, 000

After comparing manufacturing and purchasing, it is economically better to manufacture the product rather than purchasing (Siqueira, 1999).

2. Strategically thinking, why might management opt for other than the most economical choice?

Management knows that cost of purchasing is lesser than the manufacturing, still the management went for the manufacture option because they can establish in the market. This way the management will have its own manufacturing team rather than depending on the manufacturer. There is always a chance that a manufacturer will still have control over the pricing, and they can increase any time they want it which in turn makes management depend on them. So, the management took the option to manufacture rather than purchase from the vendor (Kerzner, 2017).

Reference

Siqueira, I. (1999). Automated Cost Estimating System Using Neural Networks. Project Management Journal, 30(1), 11.. Retrieved from http://0-eds.a.ebscohost.com.library.acaweb.org/eds/pdfviewer/pdfviewer?vid=4&sid=b4172523-77b4-4a10-bb99-c9d2aa97bf69%40sessionmgr4008

Kerzner, H. (2017). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.

Using expected value, is it economically better to make or buy the component?

Using expected value calculations, it is economically better to make the component. Let’s look at how we arrive at this recommendation.

The total costs to purchase the component would be $720,000 ($72 per component x 10,000 units). The cost to manufacture the product would be $758,000 ($100,000 setup + $400,000 raw material + 8,000 defect fixing). Thus, the company would save $38,000 in costs if were to manufacture instead of purchasing the component from the market.

 

2   Strategically thinking, why might management opt for other than the most economical choice?

In this particular case study, one of the reasons that the management might opt to purchase instead of manufacture, even though manufacturing is the most economical choice, is because of the lack of experience it has in manufacturing this component. Lack of expertise in manufacturing presents great risks, especially when considering new products. Even though the manufacturing team expects low defects that is probably a quantitative analysis that has not factored in the lack of manufacturing experience and probably needs a more detailed analysis. (Bragg, 2018) The other reason that the management might choose to buy instead is that manufacturing is not their core competency. If the company is known as an expert in building products rather than manufacturing components, and if there are already competitors in the market for that component that have economies of scale and manufacture at a much lower cost, then the management might just choose to purchase instead. Also, since this is a new product that the company has been asked to design and build, maybe that component is something that would only be used for this product and has now viability for any of the other regular projects that the company works on or the products that it builds. It is only a one-time contract after all. This would also prompt the company from not investing in setup costs if the machines that they purchase could not be used for manufacturing any other components or would not be used for anything else. A key factor that has not been considered in this case study is the timeline for building the new product. If the contract calls for building the product in a short time and the manufacturing team would not be able to produce the required quantity in that time, then irrespective of the cost savings, the company would not be able to meet the deadlines and thus would lose face in front of the client. The management team should use a risk matrix to identify the risks, assign risk ratings, and prioritize risks based on those ratings to identify the impacts on the manufacturing process. (Kerzner, 2013)

 

References:

Kerzner, H. (2013). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. (pp. 894-896). John Wiley & Sons, Inc.

 

Bragg, S. (2018, May 2). Make or buy analysis. AccountingTools. 

https://www.accountingtools.com/articles/make-or-buy-analysis.html