FINRA is considering three alternatives for providing food services (breakfast and lunch) to its employees: creating a company owned food service and hiring its own staff, hiring an outside vendor to provide food services (outsourcing), or a combination of hiring its own staff and outsourcing. The cost of providing food services depends on future demand. The annual cost of each option (thousands of dollars) depends on demand as follows:
Staffing Options High Medium Low
Hiring Own Staff 1300 1000 975
Outside Vendor 900 600 300
Combination 800 650 500
If the demand probabilities are 0.1, 0.5, and 0.4, which decision alternative will minimize the expected cost of providing food services for the staff? What is the expected annual cost associated with that recommendation?
Decision-making and expected values are investigated. The solution is detailed and well presented.