Question

Goop Inc needs to order a raw material to make a special polymer. The demand for the polymer is forecasted to be normally distributed with a mean of 250 gallons and a standard deviation of 125 gallons. Goop sells the polymer for $25 per gallon. Goop’s purchases raw material for $10 per gallon and Goop must spend $5 per gallon to dispose off all unused raw material due to government regulations. (One gallon of raw material yields one gallon of polymer.) If demand is more than Goop can make, then Goop sells only what they made and the rest of demand is lost.

a. Suppose Good purchases 150 gallons of raw material. What is the probability that they will run out of raw material?

b. Suppose Goop wants to ensure that there is a 92% probability that they will be able to satisfy the customer’s entire demand. How many gallons of the raw material should they purchase?

c. How many gallons should Goop purchase to maximize its expected profit?

Answer 1

a.     z = (150 – 250)/125= -0.8

From the Distribution Function Table, F (-0.8) = 21.2%.

They will run out of raw material if demand exceeds this quantity, which has a 1-21.2% = 78.8% change

b.     0.92 in the Distribution function table z = 1.41.

Convert to an order quantity Q = 250 +1.41 x 125 = 426

c.      The underage cost is $25 - $10 = $15.

The overage cost is $10 + $5 = $15.

The critical ratio is 0.5, z = 0, Q = 250