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

$35.00

sing Choices

$42.50

$45.00

$49.00

Probability

25%

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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

$37.00

$43.00

$46.00

$50.00

37%

13%

Probability

10%

20%

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!)