Problem 13-07 (Algorithmic)

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	600	500
Outside vendor	900	650	350
Combination	800	650	500

1. If the demand probabilities are 0.3, 0.5, and 0.2, which decision alternative will minimize the expected cost of the data processing operation?

   Own staff Outside vendor Combination

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

   Cost (in thousands of dollars)	Propability
   fill in the blank 3	0.3
   fill in the blank 4	0.5
   fill in the blank 5	0.2
   	1.0

   What is the probability of the cost exceeding $625,000? If required, round your answer to two decimal places. Probability = fill in the blank 6

Problem 13-07 (Algorithmic) 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: Staffing Options Own staff Own staff Outside vendor Outside vendor Combination High 650 900 Combination Expected annual cost = $ 800 Demand Medium 600 650 650 Low 500 350 a. If the demand probabilities are 0.3, 0.5, and 0.2, which decision alternative will minimize the expected cost of the data processing operation? 500 annual cost associated with that recommendation? If rerequired, round your answer to the nearest dollar. b. Construct a risk profile for the optimal decision in part (a). Cost (in thousands of dollars) Propability 0.3 0.5 0.2 1.0 What is the probability of the cost exceeding $625,000? If required, round your answer to two decimal places. Probability =