A retail chain would like to launch a perishable private label product in one of its stores and the retail chain wants to understand the stock they need to maintain every day. The retail chain has decided to mark the selling price per item (of new private label product) at about $50 and it costs them $28 per item. Therefore, the profit per item is $22. They have hired a market research company to estimate the demand for the product. The market research company has estimated demand will be 40, 50, 60 or 70 units in a day with probabilities of 0.1, 0.2, 0.4, 0.3 respectively. Now the retail chain has to determine how much to stock up for a given day. Is it 40, 50, 60 or 70 units in day to meet the demand? Make the decision based on the highest expected profit that the retailer will earn. The retailer also would like to make the product available online so that they can estimate the stock they need to maintain in advance (use the same demand estimates given by market research company: 40, 50, 60, 70 as they are the best estimates before the product launch). Is it a good decision to make the product available online based on the EMVs?

Calculate the pay offs for all the supply (stock) and demand scenarios.

 

Answer rating: 100% (QA)

To find the best stocking level we need to calculate the Expected Monetary Value EMV for each possible decision 40 units 50 units 60 units and 70 unit... View the full answer