A home appliance company is interested in marketing an innovative new product. The company must decide whether to manufacture this product in house or employ a subcontractor to manufacture it. The file P06_69.xlsx contains the estimated probability distribution of the cost of manufacturing one unit of this new product (in dollars) if the home appliance company produces the product in house. This file also contains the estimated probability distribution of the cost of purchasing one unit of the product if from the subcontractor. There is also uncertainty about demand for the product in the coming year, as shown in the same file.
The company plans to meet all demand, but there is a capacity issue. The subcontractor has unlimited capacity, but the home appliance company has capacity for only 5000 units per year. If it decides to make the product in house and demand is greater than capacity it will have to purchase the excess demand from an external source at a premium: $225 per unit. Assuming that the company wants to minimize the expected cost of meeting demand in the coming year, should it make the new product in house or buy it from the subcontractor? Do you need a decision tree, or will a cost table with EMV calculations suffice?

  • CreatedApril 01, 2015
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