Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 360857 • Letter: P
Question
Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. As the suppliers all reside in a location prone to hurricanes, tomadoes, flooding, and earthquakes, Phillip believes that the probability in any year of a super event that might shut down all suppliers at the same time at least 2 weeks is 4%. Such a total shutdown would cost the company approximately $520,000. He estimates the unique event risk or any of the suppliers to be 5%. Assumin that the marginal cost o managin an additional supplier is 1B 00 per ear, how many suppliers should it put e e us ssume that up to three nearly identical local suppliers are available Find the EMV for alternatives using 1, 2, or 3 suppliers. EMV(1)= (Enter your response rounded to the nearest whole number)Explanation / Answer
Probability of Super event, S = 0.04
Probability of Unique event, U = 0.05
Marginal cost of managing a supplier C = $16,000 per year
Financial loss incurred L = $520,000
EMV(n) = (S + (1-S) Un)* L + nC
EMV(1) = (0.04 + (1 - 0.04)*0.05)* 520,000 + 1*16000 = $61,760
EMV(2) = (0.04 + (1 - 0.04)* 0.052) * 520,000 + 2*16000 = $54,048
EMV(3) = (0.04 + (1 - 0.04) * 0.053) * 520,000 + 3*16000 = $68,862