Problem 2: Consider the following problem being faced by a newsboy named Freddie

Question

Problem 2: Consider the following problem being faced by a newsboy named Freddie. One of the daily newspapers that Freddie sells from his newsstand is the Financial Journal. A distributor brings the day's copies of the Financial Journal to the newsstand early each morning. Any copies unsold at the end of the day are returned to the distributor the next morning. However, to encourage ordering a large number of copies, the distributor does give a small refund for unsold copies. Here are Freddie's cost figures. Freddie pays $1.50 per copy delivered Freddie sells it at $2.50 per copy. Freddie's refund is $0.50 per unsold copy Partially because of the refund, Freddie always has taken a plentiful supply. However, he has become concerned about paying so much for copies that then have to be returned unsold, particularly since this has been occurring nearly every day. He now thinks he might be better off by ordering only a minimal number of copies and saving this extra cost To investigate this further, he has compiled the following record of his daily sales. Freddie sells anywhere between 40 and 70 copies inclusively on any given day. The frequency of the numbers between 40 and 70 are roughly equal The decision that Freddie needs to make is the number of copies to order per day from the distributor His objective is to maximize his average daily profit. Perform an Excel spreadsheet simulation with 5000 replications to help Freddie make his decision.

Explanation / Answer

Purchasing Cost =UnitPurchaseCost*OrderQuantity

Salvage Value =UnitSalvageValue*MAX(OrderQuantity-Demand,0)

Profit =SalesRevenue-PurchasingCost+SalvageValue

To obtain the desired precision, the simulation to be done in excel thorugh Run Preferences dialog box and then clicking on the Start Simulation button. will get the results of doing this. We will reach to the decision just by 500 trails also but for precision we need to take 5000 replications so mean now is $46.46, with a precision of $0.85 Thus, it is very likely (95 percent confidence) that the true value of the mean is within $0.85 of $46.46

95% confidence interval: $45.61 Mean $47.31

Freddie already has learned that an order quantity of 60 would provide a nice average daily profit of approximately $46.46. This is only an estimate, but Freddie also has learned from the 95 percent confidence interval that the average daily profit probably would turn out to be somewhere between $45.61 and $47.31

unit sale price 2.5 unit purchase cost 1.5 unit salvage value 0.5 decision variable order quantity 60 simulation demand 55 sales revenue 137.5 purchasing cost 90 salvage value 2.5 profit 50

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