Cynthia Knott\'s oyster bar buys fresh Louisiana oysters for $3 per pound and se

Question

Cynthia Knott's oyster bar buys fresh Louisiana oysters for $3 per pound and sells them for $9 per pound. Any oysters not sold that day are sold to her cousin, who has a nearby grocery store, for $2 per pound. Cynthia believes that demand follows the normal distribution, with a mean of 120 pounds and a standard deviation of 19 pounds. How many pounds should she order each day? Refer to the standard normal table for z-values.

Cynthia should order____pounds of oysters each day (round your response to one decimal place).

Explanation / Answer

First find out optimum service level = MB/ MB +MC

=6/6+1

=6/7

=0.8571

z value for 0.8571 is 1.07

Marginal Benefit=Price - Cost     = $9 - $3 =$6

Marginal Cost= Cost - Variable = $3 -$2=$1

Order per day = Mean + Z * standard deviation

=120+ 1.07 * 19

=120+20.33

=140.33 pounds of oysters

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