Maria Cakes plans to launch a new line of consumer entertainment products, but is concerned that they will not have the necessary labor force and facilities to launch the products this year. If Maria Cakes uses their owned manufacturing facilities, there is only a 20% probability that they will launch the products in time to be first to market and 80% probability they will be 2^nd to market. However, it they outsource the manufacturing, there is an 80% probability that they will be first to market and 20% probability they will be 2^nd to market. If Maria Cakes is first to market, they will earn $10M in profits while they will only earn $2M in profits if they are second to market. It will cost the company $5M to outsource the manufacturing, (so they will earn $5M in profits if they outsource and are first to market and negative $3M (-$3M) in profits if they are second to market). Using simple cash-flow analysis (and ignoring any time value of money or taxes), should they outsource manufacturing or handle the manufacturing using their own facilities?

Create the Payout Matrix and complete the calculations:

		Probability	Payout	Exp. Value	Expected Outcome Value (Net Cash Flow)
External Mfg. (Outsource) Cost = $5M	1st to Market	80%
	2nd to Market	20%
Internal Mfg. Cost = $0M	1st to Market	20%
	2nd to Market	80%

Recommendation based on Expected Outcome Value?

Answer rating: 100% (QA)

Outsourcing Market Position Probability Payout Expected Value Expected Out... View the full answer