Question: Suppose we are considering the question of how much capacity

Suppose we are considering the question of how much capacity to build in the face of uncertain demand. Assume that the cost is $20 per unit of lost sales due to insufficient capacity. Also assume that there is a cost of $7 for each unit of capacity built. The probability of various demand levels is as follows:
Demand—X Units Probability of X
0 ................. .05
1 ................. .10
2 ................. .15
3 ................. .20
4 ................. .20
5 ................. .15
6 ................. .10
7 ................. .05
a. How many units of capacity should be built to minimize the total cost of providing capacity plus lost sales?
b. State a general rule regarding the amount of capacity to build.
c. What principle does this problem illustrate?

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  • CreatedSeptember 20, 2015
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