Question

Martin Stevens, the manager of a downtown stationary shop must decide how many cartons of Valentines...

Martin Stevens, the manager of a downtown stationary shop must decide how many cartons of Valentines cards to order for the 2019 holiday. Martin has estimated demand will be 40, 80, or 120   cartons and has to decide whether to order 40, 80, or 120 cartons from his supplier. Each carton costs the shop $4.25 and will be sold for $10.00. Any unsold cartons will be sent back to the supplier and Martin will receive a $2.00 refund for each carton that he returns to the supplier.

Past sales and some additional research have given the following probability estimates for demand levels:

40 cartons, 0.30; 80 cartons, 0.40; 120 cartons, 0..30.

a. Construct a payoff table for this problem (alternatives matching the demand levels.)

b. Calculate the Expected Value for each alternative.

c. Based on your calculations, how many cartons of cards should Martin order from his supplier?

Homework Answers

Answer #1
(a) Order Demand Sold Cost Revenue Returned Returned Revenue Total Revenue Payoff
40 40 40 170 400 0 0 400 230
40 80 40 170 400 0 0 400 230
40 120 40 170 400 0 0 400 230
80 40 40 340 400 40 80 480 140
80 80 80 340 800 0 0 800 460
80 120 80 340 800 0 0 800 460
120 40 40 510 400 80 160 560 50
120 80 80 510 800 40 80 880 370
120 120 120 510 1200 0 0 1200 690
States of Nature (Demand)
40 80 120
Alternatives (Ordered) 40 $230.00 $230.00 $230.00
80 $140.00 $460.00 $460.00
120 $50.00 $370.00 $690.00
Probabilities 0.3 0.4 0.3

(c) Martin should order 120 cards from his supplier.

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