Cynthia Knott’s oyster bar buy fresh Louisiana oysters for $3 per point and sell

Question

Cynthia Knott’s oyster bar buy fresh Louisiana oysters for $3 per point and sells them for $9 per pound. Any oysters not sold that day are sold to her cousin, who has a nearby grocery store, for $2 per pound. Cynthia believes that demand follows the normal distribution, with a mean of 100 pounds and a standard deviation of 17 pounds. How many pounds should she order each day? Refer to the standard normal table for z-values.

Cynthia should order__pounds of oysters each day. (Round your response to one decimal place).

Explanation / Answer

Cu=Cost of understocking=9-3=6
Co=Cost of overstocking=3-2=1
Service Level=Cu/(Cu+Co)=6/(6+1)=6/7=0.8571
z value at service level of 0.8571=1.07
Order quantity= mean+z*Standard deviation=100+1.07*17=118.19==118

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