4. Chapter 12: Suppose we are considering the question of how much capacity to build in the face of uncertain demand. Assume that the cost is $20 per unit of lost sales due to insufficient capacity and $2 per unit due to excess capacity. Also assume that there is a cost of $7 for each unit of capacity built. The probability of various demand levels is
Demand (X units) 0 1 2 3 4 5 6 7
Probability of X 0.05 0.10 0.15 0.20 0.20 0.15 0.10 0.05
a. How many units of capacity should be built to minimize the total average cost of the decision?
b. State a general rule regarding the amount of capacity to build.© BrainMass Inc. brainmass.com October 10, 2019, 1:48 am ad1c9bdddf
The solution states a general rule regarding the amount of capacity to build.