Ch 5-Expected Monetary Value: Case Study Joe\'s bakery would like you to recomme

Question

Ch 5-Expected Monetary Value: Case Study Joe's bakery would like you to recommend how many loaves of its famous marble rye bread to bake at the beginning of the day. Each loaf costs the bakery $4.00 and can be sold for $6.00 Leftover loaves at the end of each day are donated to charity. Research has shown that the probabilities for demands of 25, 50, and 75 loaves are 30%, 20%, and 50% respectively Make a recommendation for the bakery to bake 25, 50, or 75 loaves each moming Proft Cost 1 Determine the Expected Monetary Value for each of these three different production levels below.(Hint, you need to calculate one EMV for each production level). EMV for: 25 loaves S0 loaves 5 loaves 2 How many loaves should the bakery bake each morning? Explain why

Explanation / Answer

1.)Since The Cost price is CP= 4 and Selling price SP=6

If we sell the item the expected profit P = SP-CP = 6-4 =2

Now the demand for 25 , 50 and 75 units are 0.3,0.2 and 0.5 respectively which says that

(i) demand for min 25 units is 0.3+0.2+0.5 = 1

So., EMV (25 loaves) = 1* 25*(6-4) =50  

(ii)demand for min 50 units is 0.2+0.5 = 0.7

So., EMV (50 loaves) = 0.7 * 50 * (6-4) + 0.3 * 50*(-4) [6-4 is the profit while -4 is the loss when one donates each of the loave) =  10

(iii) demand for min 75 units is 0.5

So., EMV (75 loaves) = 0.5 * 75 * (6-4) + 0.5 * 75*(-4) [6-4 is the profit while -4 is the loss when one donates each of the loave) = -75

2.) As shown in the above calculation the EMV for 25 Loaves is maximum and so the bakery can prepare 25 loaves to maximize the profit.

Hope the above answer has helped you in understanding the problem. Please upvote the ans if it has really helped you. Good Luck!!

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