Hudson Corporation is considering three options for managing its data processing

Question

Hudson Corporation is considering three options for managing its data processing operation: continuing with its own staff, hiring an outside vendor to do the managing (referred to as outsourcing), or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows:

If the demand probabilities are 0.4, 0.25, and 0.35, which decision alternative will minimize the expected cost of the data processing operation?

What is the expected annual cost associated with that recommendation? If rerequired, round your answer to the nearest dollar.

Expected annual cost = $   

Construct a risk profile for the optimal decision in part (a).

What is the probability of the cost exceeding $550,000? If required, round your answer to two decimal places.

Probability =

Demand Staffing Options High Medium Low Own staff 625 500 400 Outside vendor 850 650 350 Combination 600 400 300

Explanation / Answer

expected annual cost associated :

(i) Own stuff = 0.40 * 625 + 0.25 * 500 + 0.35 * 400 = 515

Outside vendor = 0.40 * 850 + 0.25 * 650 + 0.35 * 350 = 625

Combination = 0.40 * 600 + 0.25 * 400 + 0.35 * 300 = 445

so we will opt for combination here as it is associated with minimum cost.

(ii)

probability of the cost exceeding $550,000 = 0.25

Cost (in thousands of dollars) Propability $515,000 0.4 $625,000 0.25 $445,000 0.35 Sum 1

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