Phillip Witt, president of Witt Input Devices, wishesto 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 thatthe probability in any year of a " super-event" that might shutdown all suppliers at the same time for at least 2 weeks is 3%.Such a total shutdown would cost the company approximately$400,000. He estimates the " unique-event" risk for any of thesuppliers to be 5%. Assuming that the marginal cost of managingan additional supplier is $15,000 per year, how many suppliersshould Witt Input Devices use? Assume that up to three nearlyidentical local suppliers are available.

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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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 for at least 2 weeks is 3%.
Such a total shutdown would cost the company approximately
$400,000. 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 $15,000 per year, how many suppliers
should Witt Input Devices use? Assume that up to three nearly
identical local suppliers are available.
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