The local Office of Tourism sells souvenir calendars. The head of the office, Lu

Question

The local Office of Tourism sells souvenir calendars. The head of the office, Lucy, needs to order these calendars in advance of the main tourist season. Based on past seasons, Lucy has determined the probability of selling different quantities of the calendars for a particular tourist season.

  The Office of Tourism sells the calendars for $12.95 each. The calendars cost Lucy $5 each. The salvage value is estimated to be $0.50 per unsold calendar. Determine how many calendars Lucy should order to maximize expected profits.

Demand for Calendars Probability of Demand 75,000 0.15 80,000 0.25 85,000 0.30 90,000 0.20 95,000 0.10

Explanation / Answer

Cost of shortage (Cs) = Selling price - Cost price = 12.95 - 5 = 7.95$

Cost of excess (Ce) = Cost price - Salvage cost = 5 - 0.5 = 4.5$

Service level = Cs/(Cs+Ce) = 7.95/(7.95+4.5) = 0.64

Basis cumulative probability, the value closest to Service level is for 85,000 at 0.7

So, to maximize profit, Lucy should order 85,000 calendars

Demand for Calendars Probability of Demand Cumulative probability 75,000 0.15 0.15 80,000 0.25 0.4 85,000 0.3 0.7 90,000 0.2 0.9 95,000 0.1 1

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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