Problem S11.2 EQuestion Help Phillip Witt, president of Witt Input Devices, wish

Question

Problem S11.2 EQuestion Help Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. As the suppliers all reside in a location prone to hurricanes, tornadoes, flooding, and earthquakes, Phillip believes that the probability in any year of a "super-event" that might shut down all suppliers at the same time at least 2 weeks is 3%. Such a total shutdown would cost the company approximately $480,000. He estimates the "unique-event" risk for any of the suppliers to be 5%. Assuming that the marginal cost of managing an additional supplier is $15,500 per year, how many suppliers should Witt Input Devices use? Assume that up to three nearly identical local suppliers are available Find the EMV for alternatives using 1, 2, or 3 suppliers. EMV1) (Enter your response rounded to the nearest whole number)

Explanation / Answer

Probability of super event, S = 3%

Probability of unique event, U = 5%

Amount of loss on total disruption, L = 480,000

Marginal cost of managing a supplier, C = 15,500

EMV(n) = (S+(1-S)*Un)*L+ nC

EMV(1) = (0.03+(1-0.03)*0.051)*480000 + 1*15500 = $ 53,180

EMV(2) = (0.03+(1-0.03)*0.052)*480000 + 2*15500 = $ 46,564

EMV(3) = (0.03+(1-0.03)*0.053)*480000 + 3*15500 = $ 60,958

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.