XYZ Company faces a typical make or buy decision. On one hand, XYZ could produce the Blender
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Question:
XYZ Company faces a typical “make or buy decision”. On one hand, XYZ could produce the Blender for Smoothies itself. Cost estimates in this case are as follows:
Alternative: Make Blender for Smoothie | |
Cost per Unit ($) | Chance (%) |
35.00 | 25 |
42.50 | 25 |
45.00 | 37 |
49.00 | 13 |
The company also could have the blender made by a subcontractor. The subcontractor, however, faces similar uncertainties regarding the costs and has provided XYZ Company with the following schedule of costs and chances:
Alternative: Buy Blender for Smoothie | |
Cost per Unit ($) | Chance (%) |
37.00 | 10 |
43.00 | 40 |
46.00 | 30 |
50.00 | 20 |
If XYZ Company wants to minimize its expected cost of production in this case should it make or buy?
a. Draw and solve the decision tree for the given problem to support your recommendation.
b. Construct cumulative risk profiles for all possible strategies on one graph. Can you draw any conclusions regarding dominance? Explain
Related Book For
Making Hard Decisions with decision tools
ISBN: 978-0538797573
3rd edition
Authors: Robert Clemen, Terence Reilly
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