Magazine Problem

# 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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## This note was uploaded on 04/09/2010 for the course GSC 3600 taught by Professor Verma during the Winter '10 term at Wayne State University.

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

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