Question

Kang 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, Demand : High = 700, Medium = 700, Low = 650
- Staffing Options = Outside vendor, Demand : High = 950, Medium = 650, Low = 350
- Staffing Options = Combination, Demand : High = 850, Medium = 700, Low = 550

(a) 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? What is the expected annual cost assoclated with that recommendation? (Enter your answers in dollars.)
EV (Own staff) = $_______
EV (Outside vendor) = $_______
EV (Combination) = $_______
The decislon alternative that minimizes the expected cost is_______ The expected annual cost associated with this recommendation is _______

Answer 1

To minimize costs in data processing operations, Kang Corporation should consider outsourcing, which involves hiring an external company for certain tasks, or offshoring, moving operations to access cheaper labor markets. These strategies can provide significant cost savings and are part of evolving competitive business practices.

Step-by-step explanation:

When Kang Corporation is evaluating options like maintaining its own staff, outsourcing, or a hybrid approach for data processing operations, it is attempting to minimize costs in response to potential future demand. Outsourcing is a process where an organization hires another company to perform tasks that were previously handled internally, a strategy that can lead to major cost savings by leveraging cheaper labor markets.

Another option, offshoring, involves moving operations overseas for similar cost benefits. As business environments evolve, such as in the 1990s in Japan and the US, companies are often pressured to adapt their production strategies to remain competitive. For instance, companies might shift to less capital-intensive production technologies when the cost of machinery increases.