Question

The ABC company sells another product SKU37. But this is a seasonal product only sold in the spring. seasonal deman is drawn from normal distribution with mean 100 and Standard Deviation 25. the selling price is $40 per unit and the Purchase cost is $10 per unit. All unsold units are destroyed at no cost.

1- What is the Optimal Oreder Quantity? Answered OQ = 100 + .67 x 25 = 117

2- Suppose Frank informs you that he has heared about a new firm that for a fee of $100, will reduce the uncertainty in demand to a standard deviation of 10 unit. Should you tell Frank to hie this firm? why, why not? Please step by step

3- How much are you willing to pay to reduce the Standard deviation from 25 to 0 Zero

Answer 1

1. Optimal Order Quantity =

Critical Ratio: Cu/Co+Cu = 30/(10+30) = 30/40 = 0.75

Looking in Z table =

z=0.67

OQ = 100 + .67 x 25 = 117

2) New OQ = 106.7

It is benefial