A company is considering three options for managing its data processing operatio
ID: 3123515 • Letter: A
Question
A company is considering three options for managing its data processing operation: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. There are three levels of demand under consideration: high, medium, and low. The annual profit associated with each option (in $1,000) for each level of demand is given below:
Demand Level
Staffing Options High Medium Low
Own staff 1000 800 450
Outside vendor 800 700 550
Combination 900 750 600
The probabilities are given by P(high demand) = 0.2, P(medium demand) = 0.5, and P(low demand) = 0.3.
*Please do not use computer software for this problem. Please show your work, thanks.
b. Compute the expected regret value for each decision and select the best one.
c. Calculate and interpret the expected value of perfect information.
Explanation / Answer
b) Staffing Options High Medium Low
Own staff 1000 800 450
Outside vendor 800 700 550
Combination 900 750 600
Probability 0.2 0.5 0.3
Profit of each category:
Own staff = 1000 * 0.2 + 800 * 0.5 + 450 * 0.3 = $735000
Outside vendor= 800 * 0.2 + 700 * 0.5 + 550 * 0.3 = $675000
Combination = 900 * 0.2 + 750 * 0.5 + 600 * 0.3 = $735000
So, Own staff and Combination can either be chosen as they have same profit.
c) Expected value when perfect information is there. We will choose each which has maximum profit cell.
Staffing Options High Medium Low
Own staff 1000 800 450
Outside vendor 800 700 550
Combination 900 750 600
So, choose 1000 from high demand, 800 from medium and 600 from low demand to find this.
1000 * 0.2 + 800 * 0.5 + 600 * 0.3 = $780000
Expected value of perfect information = $780000 - $735000 = $45000
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