Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of l
ID: 465797 • 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 2%. Such a total shutdown would cost the company approximately $520,000. He estimates the "unique-event" risk for any of the suppliers to be 5%. Assuming that the marginal cost of managing an 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.Explanation / Answer
Total shut down cost =$520,000 that for 2%
Unique risk suppliers is 5%
Additional supplier cost per year is $16,000
First supplier = 16,000 *5/100=$800(risk amount)
Second supplier =32,000*5/100=$1600(risk amount)
Third supplier =48,000*5/100=$2400(risk amount)
Fourth supplier = 64,000*5/100=$3200(risk amount)
Fifth supplier =80,000 * 5/100 =$4,000(risk amount)
Total shut down risk =$520,000 * 2/100 = $10,400(risk value)
$800 + $1600+ $2400 + $3200=$8,000
so upto four supplier he can use