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Project Risk, Procurement and

3/23/2017
Integration Management
Individual assignment

NAME : MAHIR MALIK NSAIF


ID : 110030766
TELOXY ENGINEERING (A)

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 discounts. 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 willrequire 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
manufactured 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. Using expected value, is it economically better to make or buy the component?
2. Strategically thinking, why might management opt for other than the most economical
choice?
After the calculation is done, we find that the cost per unit is 69.7-68.7 if we produce 16000-
18000, so the strategically it would be better to produce the parts our own, not only will it be
cheaper (The cost per unit include repairs and removals etc.) but the company will also move
to be a manufacturing company that can develop and expand and manufacture for other
companies.

1
- Unit 10,000
Defective Probability (Defective*Probability)
0% 10% 0
10% 20% 2
20% 30% 6
30% 25% 7.5
40% 15% 6
21.5%

Setup cost = 100,000.


The raw material cost = $40 per component.
Repaired a cost = $120 per part.
Total raw material = setup cost * raw material per component = 100,000 * 40 = 400,000.
Repairing cost = X units * sum (Defective*Probability) = 10,000 * 21.5% = 2150.
Total Preparing cost = Preparing cost * Preparing a cost per part = 2150 * 120 =
258,000.
Total cost = setup cost + raw material + total preparing cost = 100,000 + 400,000 +
258,000 = 758,000.

TELOXY ENGINEERING (B)

Your manufacturing team informs you that they have found a way to increase the size of the
manufacturing run from 10,000 to 18,000 units in increments of 2000 units. However, the
setup cost will be $150,000 rather than $100,000 for all production runs greater than 10,000
units and defects will cost the same $120 for removal and repair.

1. Calculate the economic feasibility of make or buy.


2. Should the probability of defects change if we produce 18,000 units as opposed to
10,000 units?
3. Would your answer to question 1 change if Teloxy management believes that followon
contracts will be forthcoming? What would happen if the probability of defects
changes to 15 percent, 25 percent, 40 percent, 15 percent, and 5 percent due to
learning-curve efficiencies?

2
Defective Probability (Defective * Probability)
0% 15% 0
10% 25% 2.5
20% 40% 8
30% 15% 4.5
40% 5% 2
17%

Units Setup cost Total raw material


12,000 150,000 (12,000*40) =480,000
14,000 150,000 (14,000*40)= 560,000
16,000 150,000 (16,000*40) =640,000
18,000 150,000 (18,000*40) =720,000

To Calculate Number of DEFECTED UNITS


Units Rate of Defect Defected Units
12000 17% 2040
14000 17% 2380
16000 17% 2720
18000 17% 3060

To Calculate COST OF REPAIR FOR DEFECTED UNITS


Units Defected Units Total preparing cost= (Defected Units * $120
for removal and repair)
12,000 2040 244,800
14,000 2380 285,600
16,000 2720 326,400
18,000 3060 367,200

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(Setup cost + Material + Repair) Cost Per Unit
874800 874800/12000=72.9
995600 995600/14000=71.1
1116400 1116400/16000=69.7
1237200 1237200/18000=68.7

Typical values for the exponent K are:

Learning curve % K
100 0.000
95 0.074
90 0.152
85 0.235
80 0.322
75 0.415
70 0.515

3. A company working on a 75 percent learning curve has decided that the production
standard should be 85 hours of production for the 100th unit. How much time should be
required for the first unit? If the first unit requires more hours than you anticipated, does this
mean that the learning curve is wrong?

T1=Tx(x)k

K= 0.415, Tx= 75, X=100th unit

T1 = 75(100)0.415

T1 = 574.67

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4. A company has just received a contract for 700 units of a certain product. The pricing
department has predicted that the first unit should require 2,250 hours. The pricing
department believes that a 75 percent learning curve is justified. If the actual learning curve is
77 percent, how much money has the company lost? Assume that a fully burdened hour is
$65. What percentage error in total hours results from a 2 percent increase in learning curve
percentage?

%75 %80
T1 = 2250 hrs T1 = 2250 hrs
X = 700 X = 700
Tx =? Tx =?
Tx = 2250(700)−0.415 = 148.41 Tx = 2250(700)−0.322 = 272.93
Tc = 148.42\(1-0.415) = 253.69 Tc = 272.93(1-0.322) = 402.55
Tc to all units = 700*253.69 = 177583 Tc for all units = 700*402.55 = 281785
Percentage difference

(281785 – 177583)/177583 = 0.58 = 58%

5. A company has decided to bid on a follow-on contract for 500 units of a product. The
company has already produced 2,000 units on a 75 percent learning curve. The 2000th unit
requires 80 hours of production time. If a fully burdened hour is $80 and the company wishes
to generate a 12 percent profit, how much should be bid?

2000 units 2500 units


Tx = 80 hrs T1 = 1875 hrs
K = 0.415 K = 0.415
T1 = ?? X = 2500
Tx??
𝑇1 = 80 ∗ (2000)0.415 = 1875 hrs 𝑇1 = 1875 ∗ (2500)−0.415 = 72.12 hrs
Tc one unit = 80\(1-0.415) = 136.75 Tc to one unit = 72.12\(1-0.415) = 124.61
Total = 135.75 * 2000 = 237,400 Total = 124.61 * 2500 = 311,600
Difference = 311,600 – 237,700 = 38200
Difference cost = 38200 * 80 = 3056000
Total profit = 3056000 * 1.12 = 3427720

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6. An arable farmer is thinking of sowing scientifically modified crops next year. She
believes that if she did so her profits would be $75,000, compared to $50,000 if she sowed
unmodified crops. A neighbouring farmer has made it clear that if his crops are contaminated
he will demand compensation. The arable farmer guesses the probability of contamination to
be 35%. In the event that the neighbouring farmer claims compensation there is a 25% chance
that the arable farmer would have to pay $25,000 in compensation and a 75% chance she
would have to pay $50,000 in compensation.

a). Construct a decision tree and use it to advise the arable farmer

b). An expert puts the probability that there will be contamination of the crops of the
neighbouring farmer at 60%. Should the arable farmer change her strategy in the light of this
information?

Modified CROPS:

We will calculate the modified crops first on 25% and 75%

= (0.75*50,000) + (0.25*25,000) = 43,750$

Then we will calculate the second on 65% and 35%

= (0.35*43,750) + (0.65*75,000) = 640625$

So we will take the modified crops

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The second tree

We will calculate the modified crops first on 25% and 75%

= (0.75*50,000) + (0.25*25,000) = 43,750$

Then we will calculate the second on 60% and 40%

= (0.40*43,750) + (0.60*75,000) = 62,000$

So we will take the modified crops

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