You are considering adding a new food product to your store for resale. You are

Question

You are considering adding a new food product to your store for resale. You are certain that, in a month, minimum demand for the product will be 6 units, while maximum demand will be 8 units. (Unfortunately, the new product has a one-month shelf life and is considered to be waste at the end of the month.) You will pay $60/unit for this new product while you plan to sell the product at a $40/unit profit. The estimated demand for this new product in any given month is 6 units(p=0.1), 7 units(p=0.4), and 8 units(p=0.5). Using EMV analysis, how many units of the new product should be purchased for resale?

Explanation / Answer

Here, if the probability of a favorable market is the same as the probability of an unfavorable market, then we can assume that the probability of each is 0.5. So now we can compute the required values: a) EMV Major: 0.5*100000 + 0.5*(-90000) = $5,000 b) EMV Minor: 0.5*40000 + 0.5*(-20000) = $10,000 c) EMV Nothing: 0.5*1000 + 0.5*0 = $500 d) Clearly the best alternative is a minor renovation

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.