Opportunity cost of capital and physical storage costs

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Reference no: EM13843499

Zazz, a maker of a hot new MP3 player, is concerned about the availability of flash memory chips, a key component in the Zazz3 player. It is the start of April and Zazz must commit to a flash memory chip quantity for delivery in July. Each chip ordered now will cost Zazz $40. Zazz expects that demand for chips in July is normally distributed with a mean of 250,000 and a standard deviation of 200,000. If Zazz’s demand in July exceeds its regular order (the amount ordered in April) then Zazz can obtain additional units on the spot market. The spot market price for these chips in July is estimated to be $50. Chips not used in July will certainly be used in August. However, chips ordered in May for August delivery are expected to cost $36. Furthermore, there is a $1 cost to hold each chip from one month to the next (due to the opportunity cost of capital and physical storage costs). How many chips should Zazz order in April?

Reference no: EM13843499

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