Khan 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 euros) 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

a. If the demand probabilities are 0.2, 0.5 and 0.3, which decision alternative will mini-mize the expected cost of the data processing operation? What is the expected annual cost associated with that recommendation?

b. Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding E700 000?