A stereo warehouse sells stereo sets, which it orders from Japan. Because of shi

Question

A stereo warehouse sells stereo sets, which it orders from Japan. Because of shipping and handling costs, each order must be for six stereos. Because of the time it takes to receive an order, the warehouse outlet places an order every time the present stock (on hand + in transit) drops to four stereos. It costs $200 to place an order. It costs the warehouse $500 in lost sales when a customer asks for a stereo and the warehouse is out of stock. It costs $50 to keep each stereo stored in the warehouse. If a customer cannot purchase a stereo when it is requested, the customer will not wait until one comes in but will go to a competitor. The following relative frequencies for demand for stereos have been determined.
Demand per Week Relative Frequency
0 0.08
1 0.04
2 0.40
3 0.28
4 0.02
5 0.02
6 0.16
The time required to receive an order once it is placed has the following relative frequencies:
Time to Receive an Order (weeks) Relative Frequency
1 0.10
2 0.30
3 0.60
The warehouse presently has six stereos in stock. Orders are always received at the beginning of the week. Simulate the Stereo Warehouse

Explanation / Answer

average ordering cost = 0.08*0.1+0.04*0.3+0.4*0.6 =0.008+0.012+0.24 =0.26

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