Question

Ritz​ Products's materials​ manager, Tej​ Dhakar, must determine whether to make or buy a new semiconductor for the wrist TV that the firm is about to produce. Three million units are expected to be produced over the life cycle. If the product is​ made, start-up and production costs of the make decision total ​$ 2 ​million, with a probability of 0.4 that the product will be satisfactory and a 0.6 probability that it will not. If the product is not​ satisfactory, the firm will have to reevaluate the decision. If the decision is​ reevaluated, the choice will be whether to spend another ​$ 2 million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.5. If the second make decision also​ fails, the firm must purchase. Regardless of when the purchase takes​ place, Dhakar's best judgment of cost is that Ritz will pay ​$ 0.40 for each purchased semiconductor plus ​$ 1 million in vendor development cost.
​a) Assuming that Ritz must have the semiconductor​ (stopping or doing without is not a viable​ option), what is the best​ decision?
The firm should
____
the semiconductors because this decision has an expected cost of ​$
____. ​(Enter your response as an integer​.)

Answer 1

Since Ritz Products must have the semiconductor, its best decision should be to purchase the semiconductors.  The decision to purchase has an expected cost of $2,200,000.

• This will be far less than the cost of producing the semiconductor because the probability of success for the production option is only 0.4 with a higher failure probability of 0.6 involving additional cost of $2 million.

• Whereas, the cost of purchasing the semiconductors is only $2.2 million, calculated as follows:

Cost of Purchase:

Variable cost = $1.2 million (3 million x $0.40)

Fixed cost = $1 million

Total costs = $2.2 million

Thus, it will cost Ritz Products only $2.2 million to purchase the semiconductor.

Learn more about buy or make decisions at brainly.com/question/8821357 and brainly.com/question/14270406