What is optimal number of cameras to order

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Reference no: EM131843645

Question: A camera store specializes in a particular popular and fancy camera. Assume that these cameras become obsolete at the end of the month. They guarantee that if they are out of stock, they will special order the camera and promise delivery the next day. In fact, what the store does is to purchase the camera from an out of state retailer and have it delivered through an express service. Thus, when the store is out of stock, they actually lose the sales price of the camera and the shipping charge, but they maintain their good reputation. The retail price of the camera is $600, and the special delivery charge adds another $50 to the cost. At the end of each month, there is an inventory holding cost of $25 for each camera in stock (for doing inventory etc). Wholesale cost for the store to purchase the cameras is $400 each. (Assume that the order can only be made at the beginning of the month.)

a) Assume that the demand has a discrete uniform distribution from 21 to 25 cameras a month (inclusive). If 23 cameras are ordered at the beginning of a month, what are the expected overstock cost and the expected understock or shortage cost? What is the expected total cost?

b) What is optimal number of cameras to order to minimize the expected total cost?

c) Assume that the demand can be approximated by a normal distribution with mean 1000 and standard deviation 100 cameras a month. What is the optimal number of cameras to order to minimize the expected total cost?

Reference no: EM131843645

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