Consider the same company selling winter ski sleds as in your notes book. Demand
ID: 447404 • Letter: C
Question
Consider the same company selling winter ski sleds as in your notes book. Demand follows a normal distribution with a mean of 100,000 units and a standard deviation of 15,000 units. The variable cost of production is $15 per unit and the sale price is $45. To get rid of the leftover inventory faster and vacate the warehouse, the company decides to adopt a technology to dispose of the leftover inventory. With this new technology, it costs $5 to dispose of one unit. How many units should the company produce?
Explanation / Answer
Maximum Profit(MP) = $45 - $15 = $30 Maximum Loss(ML) = $15 + $5 = $20 P ML / MP + ML P 20 / 20 + 30 P 0.4000 Z Value at above probability = -0.255 Production = Mean + Z Value * SD = 100000 + 15000*-0.255 = 100000 - 3825 = 96175 units