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 3 %. Such a total shutdown would cost the company approximately $480 comma 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 $14 comma 800 per year, how many suppliers should Witt Input Devices use? Assume that up to three nearly identical local suppliers are available.

Based on the EMV value, the best choice is to use Two suppliers

Explanation:

Is necessary to consider different amount of suppliers and evaluate the cost. We will choose the number of suppliers which offers a lower cost.

EMV1 = cost of shutdown*super event risk + cost of shutdown*unique event risk + cost of managing supplier = 480000*.02 + 480000*0.05+16000 = 9600 + 24000 + 16000 = $ 49600

EMV2 = cost of shutdown*super event risk + cost of shutdown*unique event risk of each supplier*unique event risk of each supplier + cost of managing 2 suppliers = 480000*.02 + 480000*0.05*.05+16000*2 = 9600 + 1200 + 16000*2 = $ 42800

EMV3 = cost of shutdown*super event risk + cost of managing 3 suppliers = 480000*.02 + 480000*0.05*.05+16000*2 = 9600 + 16000*3 = $ 57600

Based on the EMV value, the best choice is to use Two suppliers