EcoTable is a retailer of specialty organic and ecologically friendly foods. In
ID: 381918 • Letter: E
Question
EcoTable is a retailer of specialty organic and ecologically friendly foods. In one of their Cambridge, Massachusetts, stores, they plan to offer a gift basket of Tanzanian teas for the holiday season. They plan on placing one order and any leftover inventory will be discounted at the end of the season.Expected demand for this store is 45 baskets normally distributed with a standard deviation of 10 baskets. The gift basket sells for $55, the purchase cost to EcoTable is $32, and leftover baskets will be sold for $20.What is the expected profit if EcoTable uses the newsvendor model correctly?
About $600
About $900
About $1,500
About $1,200
All previous chegg answers for this question are wrong so please dont copy from those.
Explanation / Answer
Critical ratio = cu / co+cu
where cu = 55-32 =23 and co = 32-20 =12
Critical ratio = 23 / 23+12 = 23/35 = 0.657
Looking up the correct value of z in the normal distribution table
z=0.4
Economic orer quantity = mu+ z x sigma
= 45+0.4x10 =49
From Loss function table, L(z) for z = 0.4 is 0.23
Hence expected lost sales = 0.23 xsigma = 2.3 =2
Expected sales = mu - expected lost sales = 45-2 =43
Leftover inventory = ordered quantity - sales = 49-43 =6
Profit = 43x23 -6x12 =989-72 = 908
Hence option B is correct.
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