Discussion 19549139

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   Students must read the case study “Teloxy Engineering (A)” on page 948 and answer the corresponding questions on the same page.

Discussions will consist of 2 parts: Your primary posting on the subject, and responses to two or more students postings. The primary post should be at least 300 words in length. 

All initial postings must have reference from at least two peer reviewed academic journal articles or reference and it must be in APA format.

TELOXY ENGINEERING (A) 

CASE STUDIES 

Teloxy Engineering has received a one-time contract to design and build 10,000 units of a new product. During the proposal process, management felt that the new product could be designed and manufactured at a low cost. One of the ingredients necessary to build the product was a small component that could be purchased for $60 in the marketplace, including quantity dis- counts. Accordingly, management budgeted $650,000 for the purchasing and handling of 10,000 components plus scrap. 

During the design stage, your engineering team informs you that the final design will require a somewhat higher-grade component that sells for $72 with quantity discounts. The new price is substantially higher than you had budgeted for. This will create a cost overrun. 

You meet with your manufacturing team to see if they can manufacture the component at a cheaper price than buying it from the outside. Your manufacturing team informs you that they can produce a maximum of 10,000 units, just enough to fulfill your contract. The setup cost will be $100,000 and the raw material cost is $40 per component. Since Teloxy has never manu- factured this product before, manufacturing expects the following defects: 

Percent defective 0 10 20 30 40 Probability of 10 20 30 25 15 

occurrence 

All defective parts must be removed and repaired at a cost of $120 per part. 

1. Usingexpectedvalue,isiteconomicallybettertomakeorbuythecomponent?
2. Strategicallythinking,whymightmanagementoptforotherthanthemosteconomical 

choice?