Mary Kay is trying to decide if it should produce and market a new perfume. Fixe

Question

Mary Kay is trying to decide if it should produce and market a new perfume. Fixed costs are estimated at $50,000. The selling price is $50, and demand is expected to follow a uniform distribution between 15,000 and 25,000. Variable cost is estimated with the following empirical (discrete) distribution Variable Cost $10 $15 $20 Probability .30 .45 .25 a) Determine worst case and best case profits. b) Construct the random number conversion table for variable cost. c) Fill in the following simulation table. Assume that the runs are independent. Run RN for Actual RN for Actual Number Var. Cost Var. Cost Demand Demand Profit 1 98 125 2 05 896

Explanation / Answer

a) Best case profit = 50(25,000) - [50,000 + 25,000(10)] = 950,000 $

Worst case profit = 50(15,000) - [50,000 + 15,000(20)] = 400,000 $

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