Answer:
The recommended production quantity is that which maximizes profit.
<em>Quantity 130</em>
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Explanation:
Quantity to produce is the problem here. Remember that this is one of the fundamental questions in the discipline of Economics.
- What to produce?     - For whom to produce?
- How to produce?      - In what quantity?
Possible Production Quantities:
100,  110,  120, and 130
Mean Demand = 100
Standard Deviation = 20
Lowest possible demand = 100 - 20 = 80units
Highest possible demand = 100 + 20 = 120units
<u>* Solve, using the mean demand for each quantity level. Assume also that on every Monday, the minimum possible quantity is what is purchased. That's the safest assumption anyway.</u>
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FOR QUANTITY 100,
Revenue = 7×100 = $700      Direct cost = 2×100 = $200
Indirect cost = 0.6×20 = $12          Total cost = 200 + 12 = $212
PROFIT = 700 - 212 = $488
FOR QUANTITY 110,
Revenue = 7×110 = $770        Direct cost = 2×110 = $220
Indirect cost = 0.6×30 = $18           Total cost = 220 + 18 = $238
PROFIT = 770 - 238 = $532
FOR QUANTITY 120,
Revenue = 7×120 = $840        Direct cost = 2×120 = $240
Indirect cost = 0.6×40 = $24           Total cost = $264
PROFIT = 840 - 264 = $576
FOR QUANTITY 130,
Revenue = 7×130 = $910          Direct cost = 2×130 = $260
Indirect cost = 0.6×50 = $30            Total cost = $290
PROFIT = 910 - 290 = $620
<em>Remember, the base assumption is that only the minimum quantity of 80units is bought each Monday. This is the only way to account for wastage; which costs 0.6 dollar per unit. So, the more the quantity produced, the greater the likelihood of wastage.</em>