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ID: 374808 • Letter: V
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vilrnytakeAssignmenthakeAssignmentMaindo?invoker-assignmentstakeAssignmentSessiont ocator assignment takePringrogres Problem 13-07 (Algorithmic) Madson Corporation is considering three options for managing ds data proonsning operations dimang with its eens staff, Ihring an autside vevvlor te e to as outsowano) or ining·co "binatoen of tu own staf and an odin n verv or, ni" and td the atmrater, derierels on future demard. Thie arnoaf en thousands of dollars) deponds on demand as followss Demand Staffing Options Own staff Outaide vendor Combinatian High Mesltuem 1om 200 00 600300 a. If the demand probabitien are 0.5, 0.2 , and 0.3, which decision alternoative will e the expected covst of tha data procassing operatian Own staftf Own sdtaff cted annual cost associated with that Outside vendor lost .. Combinationrofile for the optirnal decision in part (a). recommendation? If rerequred, round your anower to the nearest dollar Cost (in thousands of dollars) Propability 0.5 0.2 0.3 1.0 Emeil Instructor Seve and ExitExplanation / Answer
a. If the demand probabilities are 0.5, 0.2, and 0.3, which decision alternative will minimize the expected cost of the data processing operation?
The expected cost (Own staff) = 700 *0.5 + 600 *0.2 + 500 *0.3 = 620
The expected cost (Outside vendor) = 900 *0.5 + 650 *0.2 + 400 *0.3 = 700
The expected cost (Combination) = 700 *0.5 + 600 *0.2 + 300 *0.3 = 560
The optimum decision is using a Combination of Own staff and Outside vendor as the expected cost is minimum for the combination.
What is the expected annual cost associated with that recommendation?
Expected annual cost of combination = $560,000
b. Construct a risk profile for the optimal decision in part (a).
Cost in thousand dollar
Probability
300
0.3
600
0.2
700
0.5
Total
1.0
What is the probability of the cost exceeding $625,000?
Cost will exceed $625,000 only in two conditions: ether demand is high with has the probability of 0.5
Or demand is medium (probability =0.2) and outside vendor is used (assume 1/3 probability as three options are there); in that case conditional probability = 0.2*1/3 = 0.067
Therefore total probability of the cost exceeding $625,000 = 0.5 +0.067 = 0.567 or 0.57 (two decimal places)
Cost in thousand dollar
Probability
300
0.3
600
0.2
700
0.5
Total
1.0
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