Sound Warehouse in Georgetown sells CD players (with speakers), which it orders from Fuji Electronics in Japan. Because of shipping and handling costs, each order must be for five CD players. Because of the time it takes to receive an order, the warehouse outlet places an order every time the present stock drops to five CD players. It costs $100 to place an order. It costs the warehouse $400 in lost sales when a customer asks for a CD player and the warehouse is out of stock. It costs $40 to keep each CD player stored in the warehouse. If a customer cannot purchase a CD player when it is requested, the customer will not wait until one comes in but will go to a competitor. The following probability distribution for demand for CD players has been determined:
Demand per Month ..... Probability
0 ............. .04
1 ............ .08
2 ............ .28
3 ............ .40
4 ............ .16
5 ............ .02
6 ............ .02
1.00
The time required to receive an order once it is placed has the following probability distribution:
Time to Receive
an Order (mo.) ......... Probability
1 ............... .60
2 .............. .30
3 .............. .10
1.00
The warehouse has five CD players in stock. Orders are always received at the beginning of the week. Simulate Sound Warehouse’s ordering and sales policy for 20 months, using the first column of random numbers in Table 14.3. Compute the average monthly cost.