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RitzProducts's materialsmanager, TejDhakar, must determine whether to make or buy a new semiconductor for the wrist TV that the firm is about to produce. Two million units are expected to be produced over the life cycle. If the product ismade, start-up and production costs of the make decision total $1 million, with a probability of 0.4 that the product will be satisfactory and a 0.6 probability that it will not. If the product is notsatisfactory, the firm will have to reevaluate the decision. If the decision isreevaluated, the choice will be whether to spend another $1 million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.9. If the second make decision alsofails, the firm must purchase. Regardless of when the purchase takesplace, Dhakar's best judgment of cost is that Ritz will pay $0.60 for each purchased semiconductor plus $1 million in vendor development cost.

a) Assuming that Ritz must have the semiconductor(stopping or doing without is not a viableoption), what is the bestdecision?

The firm should _______

the semiconductors because this decision has an expected cost of $_________

b) What criteria did you use to make thisdecision?

In thiscase, expected monetary value is represented by expected cost

. To make the decision in part(a), we found the minimum

of these values.

c) What is the worst that can happen to Ritz as a result of this particulardecision? What is the best that canhappen?

The worst that can happen is that the firm spends $

. The best that can happens is that the firm only spends $

. (Enter your responses as integers.)

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