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An appliance dealer must decide how many (if any) new microwave ovens to order for next month. The ovens cost $220 and sell for $300.

"6. An appliance dealer must decide how many (if any) new microwave ovens to order for next month. The ovens cost $220 and sell for $300. Because the oven company is coming out with a new product line in two months, any ovens not sold next month will have to be sold at the dealer's half price clearance sale. Additionally, the appliance dealer feels he suffers a loss of $25 for every oven demanded when he is out of stock. On the basis of past months' sales data, the dealer estimates the probabilities of monthly demand (D) for 0, 1, 2, or 3 ovens to be .3, .4, .2, and .1, respectively.

The dealer is considering conducting a telephone survey on the customers' attitudes towards microwave ovens. The results of the survey will either be favorable (F), unfavorable (U) or no opinion (N). The dealer's probability estimates for the survey results based on the number of units demanded are:

P(F | D = 0) = .1
P(F | D = 2) .3
P(U | D = 0) = .8
P(U | D = 2) = .1
P(F | D = 1) = .2
P(F | D = 3) .9
P(U | D = 1) = .3
P(U | D = 3) = .1

a.
What is the dealer's optimal decision without conducting the survey?
b.
What is the EVPI?
c.
Based on the survey results what is the optimal decision strategy for the dealer?
d.
What is the maximum amount he should pay for this survey?
"

Kelly's Service Station does a large business in tune-ups. Demand has been averaging 210 spark plugs per week. Holding costs are $.01 per plug per week and reorder costs are estimated at $10 per order.

Kelly does not want to be out of stock on more than 1% of his orders. There is a one-day delivery time. The standard deviation of demand is five plugs per day. Assume a normal distribution of demand during lead time and a 7-day work week

a.
What inventory policy do you suggest for Kelly's station?
b.
What is the average amount of safety stock for the reorder point in (a)?
c.
What are the total variable weekly costs including safety stock costs?

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Operations Management-8212565.doc

"6. An appliance dealer must decide how many (if any) new microwave ovens to order for
next month. The ovens cost $220 and sell for $300. Because the oven company is coming
out with a new...

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