4 16 johnson marketing is interested in producing and selling an innov
4.16 Johnson Marketing is interested in producing and selling an innovative
new food processor. The decision they face is the typical "make or buy"
decision often faced by manufacturers. On one hand, Johnson could
produce the processor itself, subcontracting different subassemblies,
such as the motor or the housing. Cost estimates in this case are as follows:
Alternative: Make Food Procesor
Cost per Unit
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The company also could have the entire machine made by a subcon
tractor. The subcontractor, however, faces similar uncertainties regard-
ing the costs and has provided Johnson Marketing with the following
schedule of costs and probabilities:
Alternative Bay Food Processor
Cost per Unit
If Johnson Marketing wants to minimize its expected cost of production in
this case, should it make or buy? Construct cumulative risk profiles to sup
port your recommendation. (Hint: Use care when interpreting the graph!)
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