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JDI, Inc. is trying to decide whether to make or buy a part (#J-45FPT). Purchasing the part would cost $1.30 each. If they design and produce it themselves, it will result in a per unit cost of $0.82. However, the design investment would be $40,000. Further, they realize that for this type of part, there is a 25% chance that the part will need to be redesigned at an additional cost of $50,000. Regardless of whether they make or buy the part, JDI will need 80,000 of these parts. Using decision trees analysis and EMV, what should JDI do? Show the decision tree.

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Final answer:

After analyzing the decision using a decision tree and calculating the Expected Monetary Value (EMV), JDI, Inc. should buy the part as it has a lower total cost ($104,000) compared to the EMV of making the part ($118,100).

Step-by-step explanation:

JDI, Inc. is considering whether to make or buy a part (#J-45FPT). To analyze the decision, we must consider the costs associated with both options and apply a decision tree analysis using Expected Monetary Value (EMV).

Decision Tree Analysis

Calculate the total cost of buying the part: 80,000 parts × $1.30 each = $104,000.

Calculate the total cost of making the part without redesign:

Initial design investment = $40,000.

Production cost = 80,000 parts × $0.82 each = $65,600.

Total cost without redesign = $40,000 + $65,600 = $105,600.

Calculate the cost of making the part with redesign:

Redesign cost = $50,000 (additional).

Total cost with redesign = $105,600 (from step 2) + $50,000 = $155,600.

Calculate the EMV for making the part (including the probability of redesign):

EMV without redesign (75% chance) = 0.75 × $105,600 = $79,200.

EMV with redesign (25% chance) = 0.25 × $155,600 = $38,900.

Total EMV for making = $79,200 + $38,900 = $118,100.

Comparing the total cost of buying ($104,000) with the EMV of making the part ($118,100), JDI should choose to buy the part, as this option is less expensive.

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