Use Table 13.4 Dan McClure owns a thriving independent bookstore in artsy New Ho

Question

Use Table 13.4 Dan McClure owns a thriving independent bookstore in artsy New Hope, Pennsylvania. He must decide how many copies to order of a new book, Power and Self Destruction, an exposé on a famous politician's lurid affairs. Interest in the book will be intense at first and then fizzle quickly as attention turns to other celebrities. The book's retail price is $21, and the wholesale price is $11. The publisher will buy-back the retailer's leftover copies at a full refund, but McClure Books incurs $3 in shipping and handling costs for each book returned to the publisher. Dan believes his demand forecast can be represented by a Normal distribution with mean 200 and standard deviation 60. If a nart of tha question snecifies whether to use Table 13.4, or to use Excel, then credit for a correct

Explanation / Answer

f) For Q = 300, z-stat = (Q-µ)/ = (300-200)/60 = 1.67 ~ 1.7 (rounded up)

Using Table 13.4, corresponding value of I(z) = 1.7183

Therefore, expected leftover inventory, V = I(z) = 60*1.7183 = 103

g) Expected Sales, S = Q - V = 300 - 103 = 197

h) Underage cost , Cu = 21-11 = 10 (this is also known as marginal profit)

Overage cost, Co = 3 (this is also known as marginal loss)

Expected profit = S*Cu - V*Co = 197*10 - 103*3 = $ 1,661

i) For 97.5% in-stock probability, F(z) = 0.975

Using table 13.4, corresponding z-value = 2 (this is approx. value. Actual value would be 1.96 using NORMSINV)

Optimal order quantity = µ + z* = 200 + 2*60 = 320

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