Hanson Brothers, Inc. sells industrial-strength aluminum foil used by companies
ID: 351350 • Letter: H
Question
Hanson Brothers, Inc. sells industrial-strength aluminum foil used by companies in large-scale manufacturing processes. Their best-selling grade of aluminum foil costs $250 per square yard to manufacture and sells for $325. Due to the long manufacturing lead times involved, Hanson Brothers, Inc. can only place a single order of this product. At this price, the anticipated demand is expected to follow a normal distribution with mean of 20,000 square yards and standard deviation of 8000 square yards. Any unsold aluminum foil at the end of the sales season will be disposed of to a third party salvage operation for $75 per square yard. It costs Hanson Brothers $35 per square yard to hold inventory for the entire selling season. a) How many square yards should Hanson Brothers order for the upcoming season? b) What is the expected profit from following this policy? c) On average, how many square yards will Hanson Brothers have left over at the end of the season?
Explanation / Answer
Assuming,
C, Cost =250/yrd
P is the price=325/yrd
D is the total demand=20000 mean , std dev SD=8000
H is the holding cost per unit=35/yrd
Q is the quantity ordered each time an order is placed
When order can be placed just one time, it will be based on the average demand.
Order will be based on average demand ie 20000 units
Profits=75*20000=$150000
With 20000 ordered, on an average there will be nothing left in an inventory
Order can also be plced on standard demand plus one std dev ir 20000+8000=28000
On an average only 20000 will be sold and 8000 will be held in inventory
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