A manufacturer of lawn care equipment has introduced a new product. The anticipa

Question

A manufacturer of lawn care equipment has introduced a new product. The anticipated demand is normally distributed witha mean of 100 and a standard deviation of 5-50. Each unit costs $75 to manufacture and the introductory price is to be $125 to achieve this level of sales. Any unsold units at the end of the season are unlikely to be very valuable and will be disposed of in a fire sale for $25 each. It costs $10 to hold a unit in inventory for the entire season. What is the expected profit? O 1023 O 3927 5968 0 4867 2820

Explanation / Answer

We produce 100 units, since the anticipated demand is that much.

Revenue = price * sales = $125 * 100 = $ 125,000

Cost= cost per unit * production = $ 75 * 100 = $ 75,000

Inventory cost = Average inventory * inventory holding cost = [(0+100)/2]*10 = $500

Expected profit = revenue - cost -inventory cost = 125,000 - 75,000 - 500 = $49,500

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