Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 433599 • 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 tonades, flod ad earthquakes, Philp beleves that the probability n any year of a Super-cent that mght shut dan al supplers at the sa et neatleast 2 weeks so Scha an al shutdown would cost the company a proom ately S450 000 He estimates the n que ever risk for any of the supplers to be 5% Assuming that the ma pralæst af additional supplier is $16,000 per year, how many suppliers should Witt Input Devices use? Assume that up to three nearly identical local suppliers are available ag Find the EMN for alternatives using 1, 2, or 3 suppliers EMVI1)-(Enter your response rounded to the nearest whole number) Enter your answer in the answer box and then click Check Answer Clear All 3 pemaining o searchExplanation / Answer
Probability of super-event, S = 0.04
Probability of unique event, U = 0.05
Marginal cost of managing a supplier, C = $ 16000
Loss in the event of total shutdown, L = $ 450000
EMV(1) = (S + (1-S)*U1)*L + 1*C = (0.04 + (1-0.04)*0.051)*450000 + 1*16000 = $ 55,600
EMV(2) = (S + (1-S)*U2)*L + 2*C = (0.04 + (1-0.04)*0.052)*450000 + 2*16000 = $ 51,080
EMV(3) = (S + (1-S)*U3)*L + 3*C = (0.04 + (1-0.04)*0.053)*450000 + 3*16000 = $ 66,054
The lowest is EMV(2) = 51080 associated with 2 suppliers. Therefore, the best choice is to use 2 suppliers.