Problem 20-11 (Algo)

Famous Albert prides himself on being the Cookie King of the West. Small, freshly baked cookies are the specialty of his shop. Famous Albert has asked for help to determine the number of cookies he should make each day. From an analysis of past demand, he estimates demand for cookies as the following:

DEMAND		PROBABILITY OF DEMAND
2,100	dozen	0.05
2,300		0.05
2,500		0.20
2,700		0.29
2,900		0.14
3,100		0.05
3,300		0.22

Each dozen sells for $0.70 and costs $0.51, which includes handling and transportation. Cookies that are not sold at the end of the day are reduced to $0.27 and sold the following day as day-old merchandise.

a. Compute the expected profit or loss for each cookie making decision quantity. (Round your answers to 2 decimal places. Enter expected losses with a negative sign.)

b. Based on your answers to part a., what is the optimal number of cookies to make?

c. By using marginal analysis, what is the optimal number of cookies to make?