Question

JDI, Inc. is trying to decide whether to make or buy a part (#J-45FPT). Purchasing the part would cost $1.50 each. If they design and produce it themselves, it will result in a per unit cost of $1.00. However, the design investment would be $50,000. Further, they realize that for this type of part, there is a 25% chance that the part will need to be redesigned at an additional cost of $50,000. Regardless of whether they make or buy the part, JDI will need 150,000 of these parts. Using decision trees analysis and EMV, what should JDI do? Show the decision tree.

Answer 1

Decision Tree:

For Purchase, cost = 150000*1.5 = 2,25,000

For Design and Produce:

Cost = 0.75*(1*1,50,000) + 0.25*(1*1,50,000 + 50,000) = 1,62,500

Also, there is 50,000 cost for initial design

Total cost = 1,62,500 + 50,000 = 2,12,500

Hence, the best option is to Design and Produce themeselves as overall cost is low