Problem 13-07 (Algorithmic)

Hudson Corporation is considering three options for managing its data processing operation: continuing with its own staff, hiring an outside vendor to do the managing (referred to as outsourcing), or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows:

	Demand
Staffing Options	High	Medium	Low
Own staff	650	450	300
Outside vendor	800	600	350
Combination	700	600	400

If the demand probabilities are 0.35, 0.25, and 0.4, which decision alternative will minimize the expected cost of the data processing operation? What is the expected annual cost associated with that recommendation? If rerequired, round your answer to the nearest dollar. Expected annual cost = $ __________

Construct a risk profile for the optimal decision in part (a).

Cost (in thousands of dollars)	Propability
____________	0.35
____________	0.25
____________	0.4
____________	1.0

What is the probability of the cost exceeding $500,000? If required, round your answer to two decimal places. Probability = _________