Using risk for this question

Each product is sold in 75-gallon drums

Product Type

Selling Prices/drum

Cost/drum

A

$600

$200

B

$850

$350

C

$400

$300

Fixed costs are assumed to follow a Uniform distribution where min = $40,000 and max = $1,600,000. Demand is assumed to be normally distributed with the following means and standard deviations:

Product Type

Mean Demand

Standard Deviation

A

3000

100

B

5000

300

C

7000

450

The operations manager has to determine the quantity to produce in the face of uncertain demand. There are two options:

Option 1 is to simply produce the mean demand for each product; and depending on the actual demand, this could result in a shortage or excess inventory.

Option 2 is to produce at a level equal to the mean demand plus one standard deviation for each product

Simulate 1000 times profit for each product under Options 1&2. Then, Compute the mean, median, standard deviation and the probability that profit is less than 0. Explain which option should be selected for each product.