Minimizing the total cost

Reference no: EM1318055

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. Also assume that there is a cost of $7 for each unit of capacity built. The probability of various demand level is as follows:

Demand-X Units	Probability of X
0	0.05
1	0.1
2	0.15
3	0.2
4	0.2
5	0.15
6	0.1
7	0.05

How many units of capacity should be built to minimize the total cost of providing capacity plus lost sales?

Reference no: EM1318055

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