Consider the following two scenarios [Option A and Option B]; Butler, Inc. has t
ID: 3208032 • Letter: C
Question
Consider the following two scenarios [Option A and Option B];
Butler, Inc. has total inventory of $200,000. Butler has this entire inventory stored in one warehouse. There is a 4% change that a fire could occur. If this fire occurs, then Butler will lose their entire inventory. [Option A]
As an alternative to keeping their entire inventory in one warehouse, Butler is considering separating their inventory evenly into two different warehouses. Once again, there is a 4% chance that a fire could occur in each warehouse. If this fire occurs, then Butler would once again lose their entire inventory in that particular warehouse. [Option B]
Compare the amount of risk Butler faces under Option A vs. Option B. Which option has more risk? Why? Show all of your work. And, explain your answer.
Explanation / Answer
Probability Distribution: X - Kilgallen has this entire inventory stored in one warehouse
P(X=x) ={ 0.04 , X=1}
={0.96 , X=0}
Probability Distribution: X - Kilgallen has inventory stored in first warehouse
Y - Kilgallen has inventory stored in second warehouse
P={ 0.04*0.04=0.0016 , X=1,
Y=1} ={0.04 , X=0,Y=1}
={0.04 , X=1,Y=0}
={1-0.04-0.04+0.0016=0.9216 , X=0,Y=0}
Risk of Option A is more as it has total loss of 200,000 in case of one fire.