How many cinnamon-raisin bagels should university deli order

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Reference no: EM132744987

Question: Every weekday morning, University Deli orders and receives a shipment of fresh bagels. Included in this shipment of bagels are cinnamon-raisin bagels. You have heard rumors that more than half of the time, University Deli runs out of cinnamon-raisin bagels by mid-morning. Suppose that University Deli pays $.20 for each cinnamon-raisin bagels that they order, and suppose that University Deli sells the bagels for $.65 each. Assume that any unsold bagels are thrown away at the end of the day.

a) Suppose that daily demand for cinnamon-raisin bagels is equally likely to be any number from one to twenty. Further, suppose that if a customer wants a cinnamon-raisin bagel, and if University Deli has sold out of cinnamon-raisin bagels, then the customer does not buy any other kind of bagel. How many cinnamon-raisin bagels should University Deli order every day to maximize its expected profit?

Underage cost = $0.65 - $0.20 = $0.45

Overage cost = $0.20 - 0 = $0.20

Critical ratio = 0.45/( 0.45 + 0.20 ) = 0.45/0.65 = 0.692

quantity = 20 - 0.692 x ( 20 - 1) = 6.85 =7

Therefore , University Deli should order , 7 cinnamon-raisin bagels every day to maximize its expected profit

b) Based on your answer to part (a), does it make sense that University Deli runs out of cinnamon-raisin bagels more than half of the time? If University Deli follows your recommendation of optimal order quantity in part (a), what percentage of the time should they run out of cinnamon-raisin bagels?

Reference no: EM132744987

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