In: Statistics and Probability
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 4%. Such a total shutdown would cost the company approximately $520 comma 000. He estimates the "unique-event" risk for any of the suppliers to be 7%. 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.