Question: The national coffee store Farbucks needs to decide in August how many holiday-edition insulated coffee mugs to order. Because the mugs are dated, those that are unsold by January 15 are considered a loss. These premium mugs sell for $23.95 and cost $6.75 each. Farbucks is uncertain of the demand. They believe that there is a 25% chance that they will sell 10,000 mugs, a 50% chance that they will sell 15,000, and a 25% chance that they will sell 20,000.
a) Build a linked-tree in PrecisionTree to determine if they should order 12,000, 15,000, or 18,000 mugs. Be sure that your model does not allow Farbucks to sell more mugs than they ordered. You can use the IF( ) command in Excel®. If demand is less than the order quantity, the amount sold is the demand. Otherwise, the amount sold is the order quantity. (See Excel's ® help or function wizard for guidance.)
b) Now, assume that any unsold mugs are discounted and sold for $5. How does this affect the decision?