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:

Explanation / Answer

Demand Staffing Options High Medium Low Total Demand Probability 0.4 0.25 0.35 Own staff 625 500 400 Expected cost Own Staff 250 125 140                  515 Outside vendor 850 650 350 Expected Cost Outside vendor 340 162.5 122.5                  625 Combination 600 400 300 Expected cost Combination                   240                      100                     105                  445 a Combination alternative will give minimum cost . Cost of combination option =$445,000 b Risk Profile   Combination Option Category Importance Urgency Description& Mitigation                                                                                                   1 High High Cost to be managed within limit with this high probable event as it is most likely to occur.No cost overrun can be allowed.                                                                                                   2 Low Low Cost overrun to be avoided in this situation , though the situation unlikely to occur.                                                                                                   3 Medium   Medium   The low cost needs to be aggressively maintained to get the advantage of cost saving Probability of cost exceeding $550,000 is 40%

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