Consider each change to the monetary inputs (the purchase cost, the selling price, and the salvage price) one at a time in Example 12.6. For each such change, either up or down, describe how the cost of understocking and the cost of overstocking change, how the critical fractile changes, and how the optimal order quantity changes. Are these changes all intuitive?
Example 12.6
ORDERING CALENDARS AT WALTON BOOKSTORE
Recall that Walton Bookstore buys calendars for $7.50, sells them at the regular price of $10, and gets a refund of $2.50 for all calendars that cannot be sold. As in Example 10.3 of Chapter 10, Walton estimates that demand for the calendar has a triangular distribution with minimum, most likely, and maximum values equal to 100, 175, and 300, respectively. How many calendars should Walton order to maximize expected profit?
Objective To use critical fractile analysis to find the optimal order quantity.