Project Management exercise question - Essay Example

Project management exercise questions Lecturer: Q17-3) Your company has asked you to determine the financial risks of manufacturing 6,000 units of a product rather than purchasing them from a vendor at $66.50 per unit. The production line will handle exactly 6,000 units and requires a one-time setup cost of $50,000. The production cost is $60/unit. Your manufacturing personnel inform you that some of the units may be defective, as shown below:% defective     0       1       2       3       4probability of occurrence (%)   40      30      20      6       4Defective items must be removed and replaced at the cost of $145/defective unit.

However, 100 percent of units purchased from vendors are defect-free. Construct a payoff table, and using the expected-value model, determine the financial risk and whether the make or buy option is best.Units purchased=6000 Cost per unit=$66.50Set up cost=$500006000*66.50+6000*60+50000=809000Nature Action 01234 Probability Production 410000418700427400436100444800 (0.4)164000410001640328001744401779200.31674801674801674.803349687220889600.21709601709601709.603419226166266880.0617440017440017443488017444177920.

041779201779201779.2035584Total s6978006978008547.60170952=6000*60=360000 =6000*60=360000 =6000*60=360000 =6000*60=360000 =6000*60=360000Total Cost =410000 418700 427400 436100 444800Expected Cost of manufacturing =410000*0.4+418700*0.3+427400*0.2 +436100*0.06 +444800*0.04=419048Expected cost of manufacturing = 41*0.4+418700*0.3+427400*0.2=419048The total cost of manufacturing is $419048, but if the firm buys from a vendor, the total cost would be $809000. The firm should therefore manufacture instead of purchasing the product from vendors.

In manufacturing, the firm will be able to save $389952. BibliographyKerzner, H. (2009). Project management: A system Aproach to planning, Scheduling, and Controlling . John Wiley $ Sons .