CASE 19.1 Rockstone International

Rockstone International is one of the world's largest diamond brokers. The firm purchases rough stones and has them cut and polished for sale in the United States and Europe. The diamond business has been very profitable, and from all indications it will continue to be so. However, R. B. Randall, president and chief executive officer for Rockstone, has stressed the need for effective management decisions throughout the organization if the firm is to remain profitable and competitive. Normally, R. B. does not involve herself in personnel decisions, but today's situation is not typical. Beth Harkness, Rockstone's personnel manager, is considering whether to hire Hans Marquis, a world-famous diamond cutter, to replace Omar Barboa, who broke both his hands in a freak skateboard accident almost a month ago. If he is hired, Hans Marquis will be paid on a commission basis at the rate of $5,000 for each stone he cuts successfully. (Because of his professional pride, Hans will accept no fee if he is unsuccessful in cutting a stone.) In the past, the decision of whether to hire Hans would have been simple. If he was available, he would be hired. However, 6 months ago, the Liechtenstein Corporation introduced the world's first diamond-cutting machine. Thismachine, which can be leased for $1,000,000 per year, is guaranteed to cut stones successfully 90% of the time. Although Hans Marquis has an excellent reputation, Rockstone International cannot be sure about his success rate because of the extreme secrecy among people in the diamond business. Hans claims that his success rate is 95%, but he has been known to exaggerate. Rockstone executives have made the following assessments, based on all the information they could obtain: Actual Success: 0.97, 0.95, 0.90, 0.85, 0.80, Rate Probability: 0.10, 0.40, 0.30, 0.10, 0.10 = 1.00

Rockstone purchases gemstones at a cost of $15,000 each. A successful cut yields four diamonds that can be sold at an average price of $35,000 each. Harry Winkler, sales and purchasing manager, reports that his projections for the next year indicate a need for 100 stones to be cut. R. B. Randall knows there must be a way to decide whether to hire Hans Marquis or lease the new cutting machine.