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	600	550	350
Outside vendor	900	650	450
Combination	700	600	400

1. 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?
   
   Own staff
   
   What is the expected annual cost associated with that recommendation? If rerequired, round your answer to the nearest dollar.
   
   Expected annual cost = $  
   
2. Construct a risk profile for the optimal decision in part (a).
   

   Cost (in thousands of dollars)	Propability
   	0.4
   	0.25
   	0.35
   	1.0

   
   What is the probability of the cost exceeding $575,000? If required, round your answer to two decimal places.
   
   Probability =

Answer 1

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