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Linear Programming and Sensitivity Analysis

You are the owner/operator of a medical electronics firm in the early stages of operation. You have just concluded a deal with an Asian manufacturer of hand-held blood glucose measuring devices bearing your brand name. You can market this receiver at a highly competitive price.
Your potential profit for various purchase levels under each of the five possible market conditions is shown in the table below.
POTENTIAL PROFIT TABLE
Market condition categories
Quantity
1
2
3
4
5
10000
100
110
120
135
140
15000
90
120
140
155
170
20000
85
110
135
160
175
25000
80
120
155
170
180
30000
65
100
155
180
195
35000
50
100
160
190
210
40000
45
95
170
200
230
45000
30
90
165
230
245
50000
20
85
160
270
295
*Profit in thousands of dollars
With no knowledge of the probabilities, how much would you stock? Why? If you think each scenario is equally likely what would be the best stocking policy?
In an effort to reach a decision on purchase and stocking you have obtained the following information from a compilation of reports and articles in trade journals. You classified the market in five categories from worst to best (1-5). Probabilities for having each category of market were estimated as follows:
Category 1. .10
2. .20
3. .50
4. .10
5 .10
a. Given this information, what would be the best stocking policy?
b. What is the expected value of perfect information for this situation?
c. If new information causes you to revise the probabilities for market condition 2 to .28 and market condition 5 to .02 would you change your decision? If so, how would you change it?

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Solution Summary

The solution to the LP problem is solved using Excel file, and the detailed setup is provided.
The expected profit for each stocking level is calculated.

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