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: Demand Staffing Options High Medium Low Own staff Outside vendor 900 650 450 Combination 700 600 400 00 550 350 (a) 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? Outside vendor What is the expected annual cost associated with that recommendation? Expected annual cost (b) Construct a risk profile for the optimal decision in part (a) The input in the box below will not be graded, but may be reviewed and considered by your instructor What is the probability of the cost exceeding $575,000? If required, round your answer to two decimal places. Probability-

Explanation / Answer

Answer:

Part a

Expected Annual Cost

Own staff = 600*0.4 + 550*0.25 + 350*0.35          =          500

Outside Vendor = 900*0.4 + 650*0.25 + 450*0.35 =          680

Combination = 700*0.4 + 600*0.25 + 400*0.35        =         570

The optimal decision is to hire own staff with an expected annual cost of $500,000.

Part b

Risk Profile

Cost                 Probability

350                  0.35    

550                  0.25

600                  0.40

The probability that the cost exceeds $575000 will be 0.40.

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