You are considering adding a new food product to your store for resale. You are certain that, in a month, minimum demand for the product will be 6 units, while maximum demand will be 8 units. (Unfortunately, the new product has a one-month shelf life and is considered to be waste at the end of the month.) You will pay $60/unit for this new product while you plan to sell the product at a $40/unit profit. The estimated demand for this new product in any given month is 6 units (p=0.1), 7 units (p=0.4), and 8 units (p=0.5). Using EMV analysis, how many units of the new product should be purchased for resale?
Let us consider the case when purchase is 6 units
If demand is 6 units then all the six units will be sold and profit =$40*6=$240
If demand is 7 units then all the six units will be sold and profit=$40*6=$240
If demand is 8 units then all the six units will be sold and profit=$40*6=$240
Solution depicts the steps to calculate the purchase quantity of a new product in the given scenario. Decision is made by using EMV criteria.