One of your classmates is inviting you into a partnership to sell holiday gift baskets. He has found a local source of unique baskets made in Thailand. The baskets are hand-made and must be ordered far in advance of the holiday season at a cost of $8 each. The plan is to fill each basket with an assortment of readily available items, which the two of you will buy on demand upon securing each order. The average cost of a basket's contents is $73. The unit selling price of a gift basket will be $100. The basket supplier has agreed to buy-back any leftover empty baskets for $2 each at the end of the season. Demand for gift baskets is random with the following discrete distribution:
Total number of gift baskets demanded. Probability
5 .07
10 .13
15 .10
20 .15
25 .10
30 .15
35 .15
40 .10
45 .05
(a) What is the marginal cost of shortage?
(b) What is the marginal cost of excess?
(c) How many empty baskets do you recommend ordering in advance of the holiday season?