Phillip Witt president of Witt Input Devices wishes to creat

Phillip Witt, president of Witt Input Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. Suppose that Philip 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 0.4%, but due to increased distance the annua costs or managing each of the distant suppliers would be 24500 il 51450 i he local supplier A total shutdown would cost the company approximately $380,000. 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) (Enter your response rounded to the nearest whole number.) EMV2)(Enter your response rounded to the nearest whole number.) EMV(3) = $ (Enter your response rounded to the nearest whole number) Based on the EMV value, the best choice is to use one supplier three suppliers two suppliers

Solution

Let,

L = Cost of the super event and Ci = Cost of the i-th supplier
L = $380,000
C1 = $14,500; C2 = $14,500+$24,500 = $39,000; C3 = $14,500+2 x $24,500 = $63,500

P(i) = Probability of stoppage (unique and super) for \'i\' suppliers chosen; i=1,2,3

P(1) = 0.004 + (1 - 0.004)*0.05¹ = 0.0538
P(2) = 0.004 + (1 - 0.004)*0.05² = 0.00649
P(3) = 0.004 + (1 - 0.004)*0.05³ = 0.00412

EMV(1) = P(1) x (L + C1) + (1 - P(1)) x C1 = 0.0538 x ($380,000+$14,500) + (1 - 0.0538) x $14,500 = $34,944

EMV(2) = P(2) x (L + C2) + (1 - P(2)) x C2 = 0.00649 x ($380,000+$39,000) + (1 - 0.00649) x $39,000 = $41,466

EMV(3) = P(3) x (L + C3) + (1 - P(3)) x C3 = 0.00412 x ($380,000+$63,500) + (1 - 0.00412) x $63,500 = $65,067

From these three values, we note that the best choice is \'one supplier\'