Teloxy Engineering has received a onetime contract to design and build 10,000 units of a new product. During the proposal process, management felt that the new prod-uct could be designed and manufactured at a low cost. One of the ingredients neces-sary to build the product was a small component that could be purchased for $60 in the marketplace, including quantity discounts. Accordingly, management budgeted $650.000 for the purchasing and handling of 10,000 components plus scrap.

During the design stage. your engineering team informs you that the final de-sign will require a somewhat higher-grade component that sells for $72 with quantity discounts. The new price is substantially higher than you had budgeted for. This will create a cost overrun.

You meet with your manufacturing team to see if they can manufacture the component at a cheaper price than buying it from the outside. Your manufacturing team informs you that they can produce a maximum of 10.000 units. Just enough to fulfill your contract. The setup cost will be $100.000 and the raw material cost is $40 per component. Since Teloxy has never manufactured this product before, manufacturing expects the following defects:

All defective parts must be removed and repaired at a cost of $120 per part.
a) Your manufacturing team informs you that they have found a way to increase the size of the manufacturing run from 10,000 to 12,000 units. However, the setup cost will be $150,000 and defects will cost the same $120 for removal and repair. It is also assumed that % of defects and probability of occurrence will remain the same as before.
b) Should the probability of defects change if we produce 18,000 units as opposed to 12,000 units?

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% defective probability of occurrence (%) 10 30 20 40 15 25 10 20