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A retail outlet sells seasonal products for $ 10 per unit. Production costs are $ 8 per unit. During the regular season unsold units will be sold at half the retail price at the end of the season. It is assumed that the demand for products is normally distributed with µ = 500 and σ = 100.
a. What is the recommended order quantity?
b. What is the probability of a stockout?
c. To make customers happy and return to the store, the owner feels that stockouts must be avoided if possible. What is the recommended quantity if the owner is willing to tolerate 0.15 probability of stockout?
d. Using your answer to section c, how much do you charge for goodwill for a stockout?
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