Klmsee Engineering Ltd. (KEL) designs and builds specially rated microbiology research laboratories worldwide. Business has been good
Question:
Klümsee Engineering Ltd. (KEL) designs and builds specially rated microbiology research laboratories worldwide. Business has been good plus KEL has bid and won a project that requires more work than they have engineers to complete. KEL estimated its on time cost of the project would be $325,000. If KEL completes the work internally and is late, each week will incur $18,000 of internal costs. KEL has to decide whether it will hire more engineers (thus incurring internal costs and risking a first ever layoff at the end of the project), subcontract the work to another firm, or enter into a joint venture with another firm completing some portion of the work and KEL engineers completing the remainder. Pierre Pharrout Engineering has submitted a bid for the complete project at $295,000. The joint venture, with Triquay Engineers, would be $256,000 for a major portion of the work with KEL completing the rest for $70,000.
However, if each outsourcing option would not complete the work on time and KEL would incur charges of $29,000 for each week the project is late. KEL has estimated the probabilities for each week the project is late.
Option On time One week late Two weeks late Three weeks late
KEL engineers only 0.5 0.4 0.1 nil
Pierre Pharrout Eng. 0.4 0.3 0.2 0.1
Joint Venture - Triquay Eng. 0.3 0.4 0.3 0.2
Deliverables:
1. Prepare a decision tree to evaluate KEL’s three options. Show all necessary calculations.
2. Based on the expected monetary value (EMV), what is KEL’s best choice (assuming the probability estimates are accurate)? Marks = 5
3. What factor(s) might influence KEL’s decision other than a choice based solely on the options’ EMV? Marks = 3
