Edges Bookstore needs to decide how many copies of a new paperback book to purchase. The store has estimated that demand will be 50, 100, 150 or 200 copies next month and has to decide whether to order 50, 100, 150 or 200 books for this period. Each book costs Edges $8.50 and can be sold for $15.00. Any unsold books will be sent back to the publisher for a $3.50 refund.
Edges has researched the market and expects the probability of selling 50 books as 0.2, 100 books as 0.35, 150 books as 0.25 and 200 books as 0.20.
a. Construct a payoff table for this problem (alternatives matching the demand levels.)
b. Calculate the Expected Value for each alternative.
c. Give a recommendation to Edges as to how many books they should order.
d. Calculate the EVwithPI and the EVof PI for this problem.
e. How would you interpret the EVof PI result?