Please explain youranswer. Palmer Cheese Company is a small manufacturer of seve
ID: 2444330 • Letter: P
Question
Please explain youranswer.Palmer Cheese Company is a small manufacturer of several differentcheese products. One product is a cheese spread sold to retailoutlets. Susan Palmer must decide how many cases of cheese spreadto manufacture each month. The probability that demand will be 6cases is 0.1, for 7 cases it is 0.4, for 8 cases it is 0.4, and for9 cases it is 0.1. The cost of every case is $45, and the priceSusan gets for each case is $95. Unfortunately, any cases not soldby the end of the month are of no value as a result of spoilage.How many cases should Susan manufacture each month? Please explain youranswer.
Explanation / Answer
They want to maximize their profits. If they produce 6 the cost will be 6(45) and the revenue will be6(95) for profit of 6(95-45) = $300 For the following, we must weight the expected revenues by therespective probabilities. If they produce 7 the cost will be 7(45) = $315 and the expectedrevenue will be (.1/.5)(6)(95) + (.4/.5)(7)(95) = $646 The expected profit if they produce 7 is $331 If they produce 8 the cost will be 8(45) = $360 and the expectedrevenue will be (.1/.9)(6)(95) + (.4/.9)(7)(95) + (.4/.9)(8)(95) =696.67 for an expected profit of $336.67 If they produce 9 the cost will be 9(45) = $405 and the expectedrevenue will be (.1)(6)(95) + (.4)(7)(95) + (.4)(8)(95) +(.1)(9)(95) = $712.5 for an expected profit of $307.5 If they produce ... the expected profit is ... 6, $300 7, $331 8, $336.67 9, $307.5 Because they want to maximize profits, they should produce 8cases