Suppose that a grocery store buys milk for $2.10 and sells it for $2.60. If the

Question

Suppose that a grocery store buys milk for $2.10 and sells it for $2.60. If the milk gets old then the grocery store can sell their unsold milk back to their wholesaler for $0.60 (so the grocery store loses $1.50 on each gallon that it has to sell back to the wholesaler). Suppose that the demand for milk is normally distributed with a mean of 2,384 gallons per week and a standard deviation of 431 gallons per week. The grocery store needs to decide how much milk to order. Suppose that instead of trying to maximize their expected profits, the store wanted to be 90% sure that they have enough milk to satisfy demand. How much milk should they order?

Explanation / Answer

Ans: mean=2384 gallons

std dev=431 gallons

z=(x-2384)/431

for 0.9 probability or sure that demand will be satisfied z value will be 1.28

1.28*431=x-2384

x=2935.68

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