Reference no: EM133227558

An air cargo company must decide how to sell its capacity. It could sell a portion of its capacity with long-term contracts. A long-term contract specifies that the buyer (the air cargo company's customer) will purchase a certain amount of cargo space at a certain price. The long-term contract rate is currently $1,700 per standard unit of space. If long-term contracts are not signed, then the company can sell its space on the spot market. The spot market price is volatile, but the expected future spot price is around $2,075. In addition, spot market demand is volatile: Sometimes the company can find customers; other times it cannot on a short-term basis. Let's consider a specific flight on a specific date. The company's capacity is 52 units. Furthermore, the company expects that spot market demand is normally distributed with a mean of 64 and a standard deviation of 42. On average, it costs the company $200 in fuel, handling, and maintenance to fly a unit of cargo.

Suppose the company is willing to use both the long-term and the spot markets. How many units of capacity should the company sell with long-term contracts to maximize revenue?

Suppose the company is willing to use both the long-term and the spot markets. How many units of capacity should the company sell with long-term contracts to maximize profit?