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A General Rule Regarding the Amount of Capacity to Build

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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.

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Solution Summary

The solution states a general rule regarding the amount of capacity to build.

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