PMP Formula of the Week: Product Manufacturing Choice

The ToyzWeMake Company is considering the risk of producing two new toys. Equipment and resources are limited and they must choose only one product to produce at this time. Based only on the information provided below, which product offers less manufacturing risk?

Product A is manufactured by revising and updating an existing toy. The initial costs are expected to cost $150,000. There is a 40 percent chance that the existing equipment will work without modifications for manufacturing the new toy and a 60 percent probability that the company will need to spend another $100,000 to modify the equipment to manufacture the new toy.

Product B is a brand new toy idea with an estimated cost of $250,000. There is a 70 percent probability of using the existing equipment without modifications and a 30 percent probability that the equipment will need modifications at an additional cost of $100,000.

A. Neither product
B. Not enough information to make determination
C. Product A
D. Product B

Reveal Answer

The correct answer is C.

Answer C, product A, is the correct answer because manufacturing product B has a greater cost risk than product A. The cost to produce product B is equal to both the cost to produce and the probability of equipment modifications for product A.

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PMP Formula of the Week Series

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• PMP Formula of the Week: Point of Total Assumption
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• PMP Formula of the Week: TCPI
• PMP Formula of the Week: Fixed-Price Incentive Fee Contract
• PMP Formula of the Week: S-Curve
• PMP Formula of the Week: Current Project Status
• PMP Formula of the Week: Project Schedule Information
• PMP Formula of the Week: Random Defective Article
• PMP Formula of the Week: Confidence Level
• PMP Formula of the Week: EV?
• PMP Formula of the Week: What is BAC?
• PMP Formula of the Week: CPI of 1.0
• PMP Formula of the Week: Product Manufacturing Choice

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