We are preparing flowers to be sold during commencement.
Before the commencement, we can purchase Q units of flowers at a cost C = $9/unit from a wholesaler. Different from the model considered in class, if we decide to purchase Q > 0 units from the wholesaler, we have to pay a shipping cost S. The value of S will be determined later and is fixed regardless of the value of Q. The retail price is R = $25/unit. The salvage value is V = $5/unit. The distribution of demand D is shown in the table below.
S = 0 (i.e., there is no shipping cost): what is the optimal order quantity Q* and the optimal expected profit, respectively?
S = 50: answer the following questions
What is the expected profit if we order 0?
What is the expected profit if we order the optimal order quantity Q*?
Between Q* and 0, which gives the better expected profit?
Can we do better by ordering a quantity different from Q* and 0? Why?
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