Magazine Problem - Profit = $5 - $3 = $2 on each magazine...

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Problem: I sell a monthly magazine for $5 each. I buy them for $3 each. Any unsold magazines at the end of the month can be returned to the publisher for $1.00 each. I project the monthly demand to be 100, 125 or 150 magazines with probabilities 0.4, 0.4 and 0.2 respectively. How many magazines should I buy every month so as to maximize profit? Solution: Selling Price = $5 per unit Cost = $3 per unit
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Unformatted text preview: Profit = $5 - $3 = $2 on each magazine sold Refund on unsold magazines = $ 1 per unit Loss on unsold magazines = $3 - $1 = $2 per unit EVENTS 100 125 150 Expected Net 0.4 0.4 0.2 Profit Buy 100 100 x $2 = $200 $200 $200 $200 Buy 125 $200 - $2 x 25 = $150 $2 x 125 =$250 $250 $210 Buy 150 $200 - $2 x 50 = $100 $250 - $2 x 25 = $200 $2 x 150 = $300 $180 Best decision is to buy 125 magazines....
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Magazine Problem - Profit = $5 - $3 = $2 on each magazine...

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