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: a. If the demand probabilities are 0.35, 0.25, and 0.4, 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 = $ b. Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $500,000? If required, Probability =

Explanation / Answer

a.) Expected cost for own staff = 0.35*650 + 0.25*450 + 0.4*300 = 460

Expected cost for outside vendor = 0.35*800 + 0.25*600 + 0.4*350 = 570

Expected cost for combination = 0.35*700 + 0.25*600 + 0.4*400 = 555

Own staff will minimie the expected cost of the data processing operation.

Cost = $460,000

b.) Risk Profile

Cost Probability 650 0.35 450 0.25 300 0.4 1

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