Philip Witt, president of Witt Input Devices, wishes to create a portfolio of lo
ID: 363128 • Letter: P
Question
Philip Witt, president of Witt Input Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. Suppose that Phillip is willing to use one local supplier and up to two more located in other territories within the country. This would reduce the probability of a super event that might shut down all suppliers at the same time at least 2 weeks to 0.3%, but due to increased distance the annual costs for managing each of the distant suppliers would be $24,500 (still $16,000 for the local supplier). A total shutdown would cost the company approximately $470,000. He estimates the "unique-event" risk for any of the suppliers to be 5%. Assuming that the local supplier would be the first one chosen, how many suppliers should witt Input Devices use? Find the EMV for alternatives using 1, 2, or 3 suppliers. EMV(1)-$ 1 (Enter your response rounded to the nearest whole number) EMV(2)-(Enter your response rounded to the nearest whole number.) EMV(3)-SLI (Enter your response rounded to the nearest whole number) Based on the EMV value, the best choice is to use one supplier two suppliers three suppliersExplanation / Answer
Probability of super-event, S = 0.3%
Probability of unique-event, U = 5%
Marginal cost of local supplier, C1 = 16000
Marginal cost of distant supplier, C = 24500
Loss on total shutdown, L = 470,000
EMV(n) = (S + (1-S)*Un)*L + C1 + (n-1)C, where n number of suppliers
EMV(1) = (0.003+(1-0.003)*0.051)*470000 + 16000 + (1-1)*24500 = $ 40,840
EMV(2) = (0.003+(1-0.003)*0.052)*470000 + 16000 + (2-1)*24500 = $ 43,081
EMV(3) = (0.003+(1-0.003)*0.053)*470000 + 16000 + (3-1)*24500 = $ 66,469
EMV(1) is the minimum. Therefore,
Based on the EMV value, the best choice is to use one supplier