Babe’s Bats manufactures baseball bats and often receives orders for bats with special logos. Currently, the managers have more orders than they can fill and have sent out letters telling customers that their orders will be delayed. Records show that when there is a delay in shipping, 35% of those orders are refused by customers when the bats are finally delivered; however, bats are not refused when no backorders exist. The company incurs an incremental cost of $1.50 to prepare a backorder. The product sells for $20, and variable production costs are $12 per unit. Because the equipment is seasonal and the bats usually have special logos, managers assume that they will not be able to easily re-sell the bats in the orders that have been refused.

REQUIRED

Calculate the expected cost of being out of stock when a customer places an order for 25 bats.