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.