Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 375322 • 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, tornadoes, 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 44%. Such a total shutdown would cost the company approximately $520 comma 000520,000. He estimates the "unique-event" risk for any of the suppliers to be 77%. Assuming that the marginal cost of managing an additional supplier is $14 comma 80014,800 per year, how many suppliers should Witt Input Devices use? Assume that up to three nearly identical local suppliers are available. Find the EMV for alternatives using 1, 2, or 3 suppliers.
Can you please show the work step by step for each?
EMV(1)=?
EMV(2)=?
EMV(3)=?
Explanation / Answer
Super event risk, S = 44%
unique event risk U = 77%
Marginal cost of managing supplier, C = 14,800
Loss in case of total shutdown, L = 520,000
EMV(n) = (S + (1-S)*Un)*L + nC
EMV(1) = (0.44 + (1-0.44)*0.771)*520000 + 1*14800 = $ 467,824
EMV(2) = (0.44 + (1-0.44)*0.772)*520000 + 2*14800 = $ 431,052
EMV(3) = (0.44 + (1-0.44)*0.773)*520000 + 3*14800 = $ 406,142