Reference no: EM131588710

Your Company has asked you to evaluate the options of building 6000 firmware (SW/HW) units or purchasing them from a vendor at $66.50 per unit. Your company has the skills and capacity to build 6000 units. The SW/HW engineers estimate the build costs at: 1) one-time setup cost of $30,000; and 2) production cost of $60/unit. The test/quality assurance personnel inform you that a percentage of the units may be defective as shown below:

% defective       0%         1%         2%         3%          4%

% probability     40%       30%        20%      6%         4%

of occurrence

The engineers estimate the costs to remove, repair, replace, and re-test defective units at $145/defective unit. However, 100% of units purchased from vendors are guaranteed to be defect-free.

a. What approach/tool would you use to evaluate the options?

b. Which option would you recommend and what is the basis for the recommendation?