Case Study Teloxy Engineering (A) Teloxy Engineering Has Rec ✓ Solved

Case Study Teloxy Engineering (A) Teloxy Engineering Has Received A One

Teloxy Engineering has received a one-time contract to design and build 10,000 units of a new product. During the proposal process, management believed the product could be designed and manufactured at low cost, initially budgeting $650,000 for acquiring 10,000 components at $60 each, including handling and scrap. However, during the final design stage, it was determined that a higher-grade component costing $72 per unit would be required, resulting in a significant cost increase and potential overrun. An alternative considered was in-house manufacturing, which involved a setup cost of $100,000 and raw material costs of $40 per component, with capacity to produce exactly 10,000 units. Since Teloxy had no prior manufacturing experience with this component, defect rates were estimated, requiring repairs at $120 per defective part.

Questions include an analysis of whether it is more economically advantageous to manufacture or purchase the component based on expected value calculations and an exploration of strategic reasons why management might choose a less economical option.

Sample Paper For Above instruction

The decision to either manufacture in-house or purchase components from the market involves a comprehensive analysis of costs, risks, and strategic considerations. In the context of Teloxy Engineering’s project to produce 10,000 units of a new product, this decision becomes crucial due to the unexpected elevation in component costs and the possibility of defects. This essay examines the economic comparison of making versus buying, utilizing expected value calculations, and also explores strategic factors influencing management decisions beyond mere cost minimization.

Economic Analysis: Make-or-Buy Decision

Fundamentally, the choice between manufacturing or purchasing hinges on the total expected costs associated with each option. Initially, management budgeted $60 per component, totaling $600,000 for 10,000 units, inclusive of handling and scrap. Nonetheless, the engineering team’s indication that a higher-grade component costing $72 might be necessary alters the economic landscape significantly. Given this, the market price now exceeds the anticipated budget, signaling a potential cost overrun if purchasing is continued as initially planned.

To evaluate whether manufacturing is economically preferable, an expected value analysis must be performed considering defect rates, manufacturing costs, and defect repair costs. Assuming the defect rate is influenced by manufacturing uncertainty, suppose a defect rate of 5% (an illustrative estimate, as actual defect percentages could vary). If 5% of defective parts necessitate repairs at $120 each, the expected additional repair cost per unit is 0.05 × $120 = $6. Consequently, the overall costs for each option can be summarized as follows:

• Buying: $72 per unit × 10,000 units = $720,000.
• Manufacturing: Fixed setup cost = $100,000, plus variable costs:
  • Raw materials: $40 per unit × 10,000 units = $400,000.
  • Expected repair costs: 10,000 units × $6 (expected repair cost per unit) = $60,000.

  Total manufacturing cost = $100,000 + $400,000 + $60,000 = $560,000.

From these calculations, manufacturing appears more cost-effective at approximately $560,000, compared to purchasing at $720,000. Even when considering higher defect rates, the cost savings from in-house production persist, provided the defect rate remains within the assumed parameters.

Strategic Considerations Beyond Cost

Despite the apparent economic advantage of manufacturing, strategic factors might influence management to prefer purchasing. Firstly, manufacturing in a new context introduces risks related to quality control, logistical challenges, and potential delays, all of which could undermine project timelines and reputation. Secondly, owning the manufacturing process might require investment in quality assurance and workforce training, which could escalate costs and complexity.

Additionally, strategic alignment with core competencies is critical; if the manufacturing of this component is outside Teloxy's primary skill set or strategic focus, outsourcing could allow management to concentrate resources on core aspects of product development and marketing. Moreover, supplier relationships could provide opportunities for innovation, bulk purchasing discounts, and supply chain resilience that in-house production might lack.

Conclusion

In conclusion, while the expected value analysis suggests that manufacturing the component could be more cost-efficient given current assumptions, strategic considerations such as risk management, quality control, core competencies, and supply chain management strongly influence the final decision. Therefore, management must balance economic benefits with strategic imperatives to arrive at an optimal decision that supports the company's broader objectives and risk appetite.

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