Answer:
Part a: The required probability for option 1 is is 0.02212.
Part b: The required probability for option 2 is is 0.01223.
Part c: The total cost for option 1 is $960617.6
Part d: The total cost for option 2 is $965870.4
Part e: Option 1 is the better option with the total cost of $960617.6 as compared to $965870.4 for option 2.
Explanation:
Part a:
For the option A
Probability of an event which can knockdown suppliers nation wide is given as
P(U)=5%
Probability of the super event such that knock out all three of these suppliers is as
P(S)=2.2%
So the required probability is given as
So the required probability is 0.02212.
Part b:
For the option B
Probability of an event which can knockdown suppliers nation wide is given as
P(U)=21%
Probability of the super event such that knock out all three of these suppliers is as
P(S)=0.3%
So the required probability is given as
So the required probability is 0.01223.
Part c:
The Cost is given as
Purchase and Transportation Cost is as P_C=$950,000
Annualized Losses is as AL=$480,000
Also the probability as calculated in part a is as P(X)= 0.02212
So the total cost is given as
So the total cost for option 1 is $960617.6
Part d:
The Cost is given as
Purchase and Transportation Cost is as P_C=$960,000
Annualized Losses is as AL=$480,000
Also the probability as calculated in part a is as P(X)= 0.01223
So the total cost is given as
So the total cost for option 2 is $965870.4
Part e
On the basis of the total cost, as the value is less for option 1 thus option 1 is the better option with the total cost of $960617.6 as compared to $965870.4 for option 2.