Reference no: EM13544499

Decision analysis --- Woman is considering opening a business to provide rental bounce houses. She plans to purchase as many bounce houses as she needs and rent them for a daily fee. She has found a supplier that will sell her bounce houses for $1250 each. A customer can rent the house for $150 per day. For an additional $50, she will have the house delivered, set up and removed. 50% of the customers elect to pay for the delivery service.

She estimates she will be able to rent the houses for 52 weeks per year. Demand for the houses will vary considerably. She estimates the weekly demand will follow the probability distribution shown below:

# Rented Probability
0 5%
1 5%
2 10%
3 10%
4 20%
5 20%
6 10%
7 5%
8 5%
9 5%
10 5%

Assume the rentals are all on the same day (Sat) so that if demand is greater than the number of houses purchased she will be unable to rent to all the potential customers.

Besides the cost of the houses, she will have to pay $600/mo in rent for business location, $800/mo for assistant and $25 per order for cleaning. The cost to deliver the houses is estimated to be $30 but only for customers who request it.

1) Create a model so she can calculate her annual profit using the expected value method. Use model to answer:
2) How many houses should she purchase to maximize her expected profit?
3) What is her expected profit for the year?
4) If she cuts her price to $120 per day how much does her profit decrease?
5) At what price does she break even for the year? Use the number of houses that you reccommended she should purchase.
6) Should she proceed with this plan? Why/why not?