Problem 4-07Hudson 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: DemandStaffing OptionsHighMediumLowOwn staff650650600Outside vendor900600300Combination800650500 If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data processing operation? _______________ (own staff, outside vendor, or combination) What is the expected annual cost associated with that recommendation?Expected annual cost = $________ (fill in the blank)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 $700,000? If required, round your answer to two decimal places.Probability = ___________ (fill in the blank)

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Answered: If the demand probabilities are 0.2,…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 30P

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Problem 4-07

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 650 650 600

Outside vendor 900 600 300

Combination 800 650 500

If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data processing operation? _______________ (own staff, outside vendor, or combination)

What is the expected annual cost associated with that recommendation?

Expected annual cost = $________ (fill in the blank)

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 $700,000? If required, round your answer to two decimal places.

Probability = ___________ (fill in the blank)

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	Demand
Staffing Options	High	Medium	Low
Own staff	650	650	600
Outside vendor	900	600	300
Combination	800	650	500