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

1. 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/Combination. What is the expected annual cost associated with that recommendation (in thousands of dollars)? Expected annual cost = $_________________fill in the blank
2. 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 = _______________ 0.2