QUESTION 23 The manager of the greeting card section of GR8 Department store is
ID: 346084 • Letter: Q
Question
QUESTION 23
The manager of the greeting card section of GR8 Department store is considering her order for Mothers’ Day cards. The cost of each box of cards is $5; each box will be sold for $10 before the first week of May, and $2 afterward. The estimated demand during the next several weeks, with associated probabilities is as follows:
Demand
Probabilities
2000
0.20
2200
0.30
2400
0.15
2600
0.15
2800
0.20
What is the best stocking level for the Mothers’ Day cards?
2000
2200
2400
2600
2800
Demand
Probabilities
2000
0.20
2200
0.30
2400
0.15
2600
0.15
2800
0.20
Explanation / Answer
Given are the following data on box of cards :
P = Price / unit = $10/ unit
C = Cost / unit = $5 / unit
Salvage price = $ 2 / unit
Therefore,
Cost of underage = Cu = P – C = $10 - $5 = $5
Cost of overage = Co = C – S = $5 - $2 = $3
Therefore , critical ratio = Cu/ ( Cu + Co) = 5 / 5+3 = 5/8 = 0.625
Critical ratio is the probability of the best stocking level
Therefore, probability of best stocking level is 0.625
Following table illustrates probabilities and corresponding minimum demand quantities at that probability level.
Demand
Probability that demand will be minimum this quantity
2000
1
2200
0.80
2400
0.50
2600
0.35
2800
0.20
Since the calculated probability of 0.625 for best stocking level is nearest to value 0.5 in the above table which corresponds to 2400 units, the best stocking level should be 2400 cards
BEST STOCKING LEVEL FOR MOTHER’S DAY CARDS = 2400
Demand
Probability that demand will be minimum this quantity
2000
1
2200
0.80
2400
0.50
2600
0.35
2800
0.20
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.