Cabot Appliances, a retail chain, is trying to decide what size order it should place with its supplier of room air conditioners. Room air conditioner sales are highly seasonal, and the number of units sold is very dependent on summer weather patterns. Cabot places one order per year. Reorders are impractical after the selling season begins to develop. Although the actual sales level cannot be known for sure, Cabot analyzes past selling seasons, long-term weather reports, and the general state of the economy. The following probabilities of various sales levels are then estimated:

A unit has a delivered price to Cabot of $320 and it is priced to customers at $400. Air conditioners unsold at the end of the season are discounted to $300, which clears them from inventory. Purchases can be made only in increments of 250 units, with a 500-unit minimum order.
a. Assuming no inventory is to be carried to the next year, what single order size should be placed?
b. Would you modify the order quantity in part a if Cabot can borrow money to support inventory at 20 percent per year? Excess units can be carried over to the next selling season.

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Sales, units 500 750 1,000 1,250 1,500 Probability 0.2 0.2 0.3 0.2 0.1 1.0