The replacement cost for defective components made in-house is $30 per defective unit.
Option #1: Make or Buy
The PMP® Certification Exam may include Make or Buy Analysis questions. Although it’s not the only reason for learning this material, this assignment helps prepare you for that type of question on the exam. The assignment is relevant whether you plan to take the PMP® exam, have already passed the exam, or have no plans to take the exam.
The calculation part of the question requires only addition and multiplication. Start by reading the scenario and then answer the questions below.
Scenario:
You are the project manager on Project VIM, which is building a new printer, scanner, copier, and fax machine from various component parts. One of the component parts for the VIM product is currently available from a supplier for $115,000 for the 5,000 units you need. You took over for a prior project manager who only allocated $90,000 for this component. This means that you will exceed your project budget if you purchase the VIM component units from this supplier.
You reach out to your in-house manufacturing group and find that you can produce these 5,000 units in-house, within a time frame that fits the project timeline. The manufacturing group indicates that there is a one-time charge of $3,000 for setting up the production line. The material and labor cost will be $12 per unit if the firm manufactures the product in-house. You also learn that since this is a new set-up (which is using old equipment), the in-house manufacturing team estimates the following defects percentages, as well as the probability of those defects occurring:
Defect % 0 25 35 40
Probability of occurrence (%) 10 60 20 10
The replacement cost for defective components made in-house is $30 per defective unit.
Calculate the following using this Excel template Download this Excel template:
Total material costs.
Expected number of defective units at each defect percentage (%).
Cost of replacing defective units at each defect percentage (%).
Material costs plus cost of replacing defective units at each defect percentage (%).
The probability of cost for the defect percentage (%) levels.
Expected value of “making” components in-house.
Address the following in a written essay:
Using the expected value, present your recommendation to make or buy the Project VIM component parts.
Will you need to issue a change request for additional money on your project? If so, for how much; and, if not, why not? What reasons do you think management might use to opt for the less economical choice?
Submission:
For the calculation section, complete the Excel template (linked above) or a similar one. Post your answers in the Excel file.
For the written essay section, submit a paper that is 2 pages long. Include a minimum of two credible references (published within the most recent 5 years), in addition to any course textbooks or lecture material you decide to use. The CSU Global Library is a good place to find these sources. Format your entire paper according to the CSU Global Writing Center. You will also find an APA template for writing a paper on the Library site. You can access the Library and the Writing Center through the links located in the left-hand navigation menu.
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