Suppose that the manager of a company has estimated the probability of a super-event sometime during the next three years that will disrupt all suppliers as 2%. In addition, the firm currently uses four suppliers for its main component, and the manager estimates the probability of a unique-event that would disrupt one of them sometime during the next three years to be 10%. Supplier management costs during this period are $30,000 per supplier. The financial cost incurred if all four suppliers are disrupted at the same time is estimated to be $10,000,000. What is the expected monetary value (cost) of the current supplier diversification arrangement?
A) $320,980
B) $415,680
C) $10,120,000
D) $318,568
E) $8,240,000

Question

Quizplus · Accepted Answer

The expected monetary value (EMV) is calculated by considering both the super-event and unique-event probabilities. The cost of supplier management is $30,000 per supplier for four suppliers, totaling $120,000. The probability of a super-event is 2%, with a cost of $10,000,000, contributing $200,000 to the EMV. The probability of a unique-event affecting one supplier is 10%, but since there are four suppliers, the probability of at least one being disrupted is 1 - (0.9^4) = 34.39%. However, the unique-event cost is not specified, so we only consider the super-event cost and management costs. Thus, EMV = $120,000 + $200,000 = $320,980.

Suppose That the Manager of a Company Has Estimated the Probability