Tri-Products Is Trying to Decide Whether to Make-Or-Buy an Accessory

question 120

Essay

Tri-products is trying to decide whether to make-or-buy an accessory item for one of their products. It is projected that this item will sell for $10 each. If the item is outsourced, there is virtually no cost other than the $6 per unit that they would pay their supplier. Internally, they have two choices. Process A requires an investment of $120,000 for design and equipment, but results in a $4 per unit cost. Process B requires only a $100,000 investment, but its per unit cost is $5. Regardless of whether the item is subcontracted or produced internally, there is a 50% chance that they will sell 50,000 units, and a 50% chance that they will sell 100,000 units. Draw the decision tree appropriate to the alternatives and outcomes stated. Using decision trees and EMV, what is their best choice?

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Definitions:

Strong Acid

An acid that completely dissociates in water, releasing a high concentration of hydrogen ions and exhibiting a low pH.

Formic Acid

A colorless, pungent liquid with the formula HCOOH, used in various chemical manufacturing processes and as a preservative.

Acetic Acid

An organic compound with the formula CH3COOH, known for its sour taste and pungent smell; it's the main component of vinegar.

Weak Acid

An acid that dissociates incompletely, releasing only some of its hydrogen ions into the solution.