University bookstore orders copies of a text book used by graduate students taki

Question

University bookstore orders copies of a text book used by graduate students taking an independent study course at Mechanical Engineering department each semester. Let Y=demand for the textbooks,with the following probability distribution:

y 1 , 2 , 3 , 4 ,5 , 6

p(y) 1/15 ,2/15,3/15,4/15,3/15, 2/15

Suppose that book store manager actually pays $ 300.00 for each copy of the text book and the price to students is $ 600.00 .If textbooks left at the end of the semester have no salvage value ,is it better to order three or four copies of the text book in terms of the net revenue expected.

Explanation / Answer

Expected number of books to be sold = sum of (y x p(y))

= (1x1/15) + (2x2/15) + (3x3/15) + (4x4/15) + (5x3/15) + (6x2/15)

= 3.8

Expected profit when 3 books are ordered = 3x(600-300) = $900

Expected profit when 4 books are ordered = 3.8x600 - 4x300

= $1080

So, it is better to order 4 copies of text books

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