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.
One 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 ?$1
?million, with a probability of 0.5 that the product will be satisfactory and a 0.5
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 ?$1
million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.9.
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 ?$0.60
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…. (MAKE/BUY) the semiconductors because this decision has an expected cost of