The firm estimates the unique-event risk

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Reference no: EM13841068

Disston Precision is trying to decide whether to use one or two suppliers for the motors than go into the chain saws that the company produces. The firm wants to use local suppliers because it runs a JIT operation. Its factory is located in a coastal town that is prone to hurricanes. The firm estimates that the probability in any year of a "super-event" that might shut down all suppliers at the same time for at least two weeks is 5%. Such a total shutdown would cost the company approximately $100,000. The firm estimates the "unique-event" risk for any of the suppliers to be 10%. Assuming that the marginal cost of managing an additional supplier is $12,000 per year, should the firm use one or two suppliers?

Reference no: EM13841068

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