Bob Davidson owns a newsstand outside the Waterstone office building complex in Atlanta, near Hartsfield International Airport.

Question:

Bob Davidson owns a newsstand outside the Waterstone office building complex in Atlanta, near Hartsfield International Airport. He buys his papers wholesale at $0.50 per paper and sells them for $0.75. Bob wonders what is the optimal number of papers to order each day. Based on history, he has found that demand (even though it is discrete) can be modeled by a normal distribution with a mean of 50 and standard deviation of 5. When he has more papers than customers, he can recycle all the extra papers the next day and receive $0.05 per paper. On the other hand, if he has more customers than papers, he loses some goodwill in addition to the lost profit on the potential sale of $0.25. Bob estimates the incremental lost goodwill costs five days’ worth of business (that is, dissatisfied customers will go to a competitor the next week, but come back to him the week after that).

a. Create a spreadsheet model to determine the optimal number of papers to order each day. Use 5000 replications and round the demand values generated by the normal RNG to the closest integer value.

b. Construct a 95% confidence interval for the expected payoff from the optimal decision.

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