Alex, a Georgia Tech Freshman, is very entrepreneurial and at the age of 19 already has a thriving, if simple business. Each morning Alex stops by the Krispy Kream Donut factory on Ponce de Leon Avenue near Georgia Tech and buys a supply of donuts, which he in turn sells to office workers commuting to work in the mid-town Atlanta business district. Alex buys his donuts by the dozen, paying $7.20 per dozen. Alex then sells his donuts 2 (each) for $3.00 (=$1.50 per donut). Several friends of Alex (also Georgia Tech students) staff a coffee kiosk adjacent to his Donut "shop" (an inside joke for the location on the side walk that Alex frequently sets up at). Collectively the students do very well and hope to maintain these business activities as long as their school schedule permits. Currently Alex is able to sell his Donuts from 6:30 am to 9:45 am, at which time he needs to leave for classes. If Alex runs out of donuts before 9:45 he simply packs up and leaves early. If Alex has unsold donuts at 9:45 he takes the unsold donuts back to his dorm where he throws away all the donuts he can't eat or give away. Alex always insists on freshly made Donuts each day for his clientele. Alex tracks his sales closely and knows for the 3 hour and 15 minute period (6:30 am - 9:45 am) his demand follows a normal distribution with a mean of 140 and a standard deviation of 28. 

Assuming that Alex intends to maximize his profits and using the Newsvendor model, how many DOZENS of Donuts should Alex buy each morning. NOTE: Remember that Alex can only buy donuts boxed as a dozen. Round up to the nearest dozen if his optimal order quantity is not a multiple of 12.

Answer rating: 100% (QA)

To determine the optimal order quantity of donuts for Alex each morning using the Newsvendor model we need to consider the tradeoff between the cost o... View the full answer