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 600 600 550 Outside vendor 850 550 250 Combination 750 600 450

(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 associated with that recommendation? (Enter your answers in dollars.)

EV(Own staff) = $ _______

EV(Outside vendor) = $__________

EV(Combination) = $____________

The decision alternative that minimizes the expected cost is ---Select----------------. The expected annual cost associated with this recommendation is $ . ___________

Answer 1

To minimize the expected cost of data processing operations at Hudson Corporation, the outside vendor option should be selected, with an expected annual cost of $545,000 as it has the lowest expected value compared to the own staff and combination options.

Step-by-step explanation:

The student is asking a question related to decision-making under uncertainty which is a key concept in business, particularly in the area of operations management. To determine the option that minimizes the expected annual cost of data processing operations at Hudson Corporation, we need to calculate the expected value (EV) for each staffing option given their respective costs under high, medium, and low demand scenarios.

We will start by calculating the EV for each staffing option:

• EV(Own staff) = (0.2 × 600) + (0.5 × 600) + (0.3 × 550) = 590 thousand dollars
• EV(Outside vendor) = (0.2 × 850) + (0.5 × 550) + (0.3 × 250) = 545 thousand dollars
• EV(Combination) = (0.2 × 750) + (0.5 × 600) + (0.3 × 450) = 600 thousand dollars

Based on the EV calculated for each option, the outside vendor option has the lowest expected annual cost and should be the chosen staffing option to minimize costs. The expected annual cost associated with this recommendation is $545,000.