The Lake Nocee Department Store has an opportunity to purchase a special shipmen

Question

The Lake Nocee Department Store has an opportunity to purchase a special shipment of X-mas tableware at $28 a set. These sets of tableware are to be sold for $35 as a special promotion during the store's 40th anniversary sale. Nocee must purchase the items in units of a dozen sets. Tableware is not part of the store's normal product lines, so if items are not sold during the X-mas cum 40th anniversary, they will be sold in the Bargain Basement for $22.20 per set. A sales consultant has estimated the following distribution of demand.

Explanation / Answer

3. The cost of underestimating the demand is Cu and cost of overestimating demand is Co Cu = $20 - $8 = $12 Co = $8 - $4 = $4 Optimal Service Level = Cu / Cu + Co = 12 / 12 + 4 = 12 / 16 = 0.75 Demand Probability Cum Prob 300 0.05 0.05 400 0.10 0.15 500 0.40 0.55 600 0.30 0.85 700 0.10 0.95 800 0.05 1.00 Comparing the service level to the cumulative probability, 600 T shirts should be produced. 4. The cost of underestimating the demand is Cu and cost of overestimating demand is Co Cu = $35 - $28 = $7 Co = $28 - $22.20 = $5.80 Optimal Service Level = Cu / Cu + Co = 7 / 7 + 5.80 = 7 / 12.80 = 0.546875 Demand Probability Cum Prob 4 0.00 0.00 5 0.10 0.10 6 0.15 0.25 7 0.25 0.50 8 0.20 0.70 9 0.15 0.85 10 0.10 0.95 11 0.05 1.00 12 0.00 1.00 Comparing the service level to the cumulative probability, 8 dozen is optimal order quantity

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