Question 3 A freight warehouse owner orders pallets of a certain commodity each

Question

Question 3 A freight warehouse owner orders pallets of a certain commodity each week. Let X denote the demand for the commodity in pallets with pmf r 1 2 3 4 5 6 15 15 15 15 15 15 The freight warehouse owner pays S 200.00 for each pallet and sells them to the customer for $ 400.00 per pallet. If the pallets are perishable commodities and whatever left at the end of the week have no salvage value, is it better to order three or four pallets? [HINT: For three and four pallets. compute expected revenue.

Explanation / Answer

Expected revenue for 3 pellets = (1/15 + 2/15 + 3/15) * 400 = 160

Total cost = (1/15 + 2/15 + 3/15) * 200 = 80

Profit = 160 - 80 = 80$

Expected revenue for 3 pellets = (1/15 + 2/15 + 3/15+ 4/15) * 400 = 266.67

Total cost = (1/15 + 2/15 + 3/15 + 4/15) * 200 = 133.33

Profit = 266.67 - 133.33 = 133.34$

So, he should order 4

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