1. Orders for clothing from a particular manufacturer for this year's Christmas shopping season must be placed in February. The cost per unit for a particular dress is $20 while the anticipated selling price is $50. Demand is projected to be 50, 60, or 70 units. There is a 40 percent chance that demand will be 50 units, a 50 percent chance that demand will be 60 units, and a 10 percent chance that demand will be 70 units. The company believes that any leftover goods will have to be scrapped. How many units should be ordered in February?
2. Outline the major steps in decision making and explain their importance to the decision making process.
The way to approach this problem is to create a profitability matrix or a payoff matrix, where we calculate the profits (revenue minus costs) for each intersection of quantity demanded and quantity produced. You'll see that in the attached Excel spreadsheet that I've put the quantity demanded in the columns and quantity supplied/produced in the rows.
Let's take a look at how these calculations were done. For a quantity demanded of 50 and a quantity supplied of 60, we ...
The probabilities associated with clothing orders are determined.