Suppose a grocer is faced with a problem of how many cases of milk to stock to
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Suppose a grocer is faced with a problem of how many cases of milk to stock to meet this week’s demand. The grocer estimates that demand will be 25, 30, 35, or 40 cases and wants to analyze the situation using a payoff table and decision theory to determine how many cases to order. Every case of milk costs the grocer $88 and will be sold for $110. Any milk that remains unsold at the end of the week will be sold to a local cheese maker for $75. Also, any unsatisfied demand bears no cost except the intangible cost of the lost sale. | sold | cost | |||||
110 | 88 | ||||||
Fill in the payoff table (Using Excel - calculate payoff for each combination of cases of milk ordered and cases of milk demanded). | |||||||
0.08 | 0.25 | 0.45 | 0.22 | ||||
Cases demanded | |||||||
25 | 30 | 35 | 40 | ||||
25 | |||||||
Cases ordered | 30 | ||||||
35 | |||||||
40 | |||||||
Assume the probability of demand is determined as in the table below. | |||||||
Demand | 25 cases | 30 case | 35 cases | 40 cases | |||
Probability | 0.08 | 0.25 | 0.45 | 0.22 | |||
Using the probabilities given: | |||||||
a. Calculate the EMV for each alternative order size. | |||||||
b. How many cases of milk should be ordered if the EMV was used? |
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
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