Question

A manager intends to order a new machine and must now decide on the number of spare parts to order along with the machine. The parts cost $486 each and have no salvage value. The manager has compiled the frequency distribution for the probable usage of spare parts:2 spare parts with frequency 0.17;3 spare parts with frequency 0.18;4 spare parts with frequency 0.06;5 spare parts with frequency 0.15; and 6 spare parts with frequency 0.44. For what range of shortage costs would stocking 4 spare parts constitute an optimal decision ?

Answer 1