Wholemark is an Internet order business that sells one popular New Year greeting
ID: 428183 • Letter: W
Question
Wholemark is an Internet order business that sells one popular New Year greeting card once a year. The cost of the paper on which the card is printed is $0.10 per card, and the cost of printing is $0.42 per card. The company receives $2.40 per card sold. Since the cards have the current year printed on them, unsold cards have no salvage value. Their customers are from the four areas: Los Angeles, Santa Monica, Hollywood, and Pasadena. Based on past data, the number of customers from each of the four regions is normally distributed with mean 2,500 and standard deviation 600. (Assume these four are independent.)
What is the optimal production quantity for the card? (Use Excel's NORMSINV() function to find the correct critical value for the given ?-level. Do not round intermediate calculations. Round your answer to the nearest whole number.)
Optimal production quantityExplanation / Answer
Total cost of the card = C = Cost of card + Cost of printing = $0.10 + $0.42 = $0.52 per card
Price of the card = P = $2.40 / card
Salvage value of the card = S = 0
Therefore,
Underage cost = Cu = P – C = $2.40 - $0.52 = $1.88 / card
Overage cost = Co = C – S = $0.52 – 0 = $0.52 / card
Therefore,
Critical ratio = Cu / Cu + Co = 1.88/( 1.88 + 0.52) =1.88/2.4 = 0.7833
Critical ratio is the probability of optimum order quantity for each region .
Therefore, probability of optimum order quantity = 0.7833
Corresponding Z value = NORMSINV ( 0.7833) = 0.783387
Therefore ,
Optimum production quantity for each region
= Mean demand + Z value x standard deviation of demand
= 2500 + 0.783387 x 600
= 2500 + 470.03
= 2970.03 ( 2970 rounded to nearest whole number )
Therefore, optimum production quantity for 4 regions = 4 x 2970 = 11880
OPTIMAL PRODUCTION QUANTITY = 11880
OPTIMAL PRODUCTION QUANTITY = 11880
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