Payoff Table and Financial Risks

Determine the financial risks of manufacturing 6,000 units of a product rather than purchasing them from a vendor.

Manufacture = $50,000 one-time set up cost + $60/unit

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

Probability
of occurrence (%) 40% 30% 20% 6% 4%

Cost to replace defectives = $145

Purchase = $66.50/unit, 100% defect free

Construct a payoff table, and using the expected-value model, determine the financial risk and whether the make or buy option is best.

© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/finance/payoff-table-and-financial-risks-7ep1