An Introduction to Management Science 13th Edition by David Anderson,Dennis Sweeney ,Thomas Williams ,Jeffrey Camm, Kipp Martin

Exercise 26

Hudson Corporation is considering three options for managing its data processing operation: continuing with its own staff, hiring an outside vendor lo 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:
a. If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the what cost associated with that recommendation.
b. Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?