Question

Bakery A sells bread for $2 per loaf that costs $0.50 per loaf to make. Bakery A gives an 80% discount for its bread at the end of the day. Demand for the bread is normally distributed with a mean of 300 and a standard deviation of 30. What order quantity maximizes expected profit for Bakery A

Answer 1

Answer:

324

Explanation:

Calculation to determine What order quantity maximizes expected profit for Bakery A

First step is for the Salvage value

Salvage value = $2 × (1 - 80%)

Salvage value= $0.40

Second step is to calculate the Overage cost

Overage cost = $0.50 - $0.40

Overage cost = $0.10

Second step is to calculate the Underage cost

Underage cost = $2 - $0.50

Underage cost = $1.50

Third step is to calculate the The critical ratio

The critical ratio = 1.5/(1.5 + 0.4) = 0.79. z = 0.8

Now let calculate the Order quantity

Order quantity = 300 + (0.8× 30)

Order quantity= 324

Therefore the order quantity maximizes expected profit for Bakery A is 324