Jessica Company buys and resells a perishable product. A large purchase at the beginning of each month provides a lower per unit cost and assures that Jessica can purchase all the items it wishes. However, unsold units at the end of each month are worthless and must be discarded. If an inadequate quantity is purchased, additional units of acceptable quality are not available.
The units, which Jessica sells for $1.25 each, are purchased at a fixed fee of $50,000 per month plus $.50 each, if at least 100,000 units are ordered and if they are ordered at the beginning of the month.
The needs of Jessica's customers limit the possible sales volumes to only four quantities per month-100,000, 120,000, 140,000, or 180,000 units. However, the total quantity needed for a given month cannot be determined prior to the date Jessica must make its purchases. The sales managers are willing to place a probability estimate on each of the four possible sales volumes each month. They noted that the probabilities for the four sales volumes change from month to month because of the seasonal nature of the customers' businesses. Their probability estimates for December, 20A, sales quantities are 10% for 100,000, 30% for 120,000, 40% for 140,000, and 20% for 180,000.
Required:
Prepare a payoff table showing the expected value of each of the four possible strategies of ordering units, assuming that only the four quantities specified are ever sold and that the occurrences are random events. Identify the best strategy.