Demand for organic super fresh lettuce in a local super market is 5 with probability 0.2; 6 with probability 0.3; 7 with probability 0.4 or 8 with probability 0.1. Unsold lettuce are given to a food bank with a salvage value of $1.00 per lettuce. Cost of the lettuce is $3:00 per unit. Selling price is $6:00 per unit. Using single period model, what is the optimal order quantity in number of units of lettuce the super market should use?
A) 7
B) 6
C) 5
D) 8
E) None of these

Question

Quizplus · Accepted Answer

The optimal order quantity is determined by the critical ratio, which is the ratio of the cost of underage to the sum of the cost of underage and overage. The critical ratio here is (6-3)/(6-3+3-1) = 0.6. The cumulative probability that is closest to 0.6 is 0.6 (0.2+0.3+0.4), which corresponds to an order quantity of 7.

Demand for Organic Super Fresh Lettuce in a Local Super