Size of Inventory Once a day, a retailer stocks bunches of fresh-cut flowers, each of which costs 40¢ and sells for $1. The retailer never cuts his price; leftovers are given to a nearby church. He estimates demand characteristics as follows: L01 DEMAND PROBABILITY

.05

.20 0 1 2 .40 3 [25 4

3}

10 or more .00 1.00 How many units should he stock in order to maximize profits? Why?

Perfect Information Refer to the preceding problem. Compute the most he should be willing to pay for a faultless prediction concerning the number of units to be sold on any given day.

Choosing a Selling Price (CPA, adapted) Management wants to determine the best sales price for a new appliance, which has a variable cost of $4 per unit. The sales manager has estimated probabilities of achieving annual sales levels for various selling prices as shown in the following chart:

SALES LEVEL (UNITS) SELLING PRICE $4 $5 $6 $7 20,000 — _ 20% 80%
30,000 _— 10% 40% 20%
40,000 50% 50% 20% —
50,000 50% 40% 20% _ Prepare a schedule computing the expected incremental income for each of the sales prices proposed for the new product. The schedule should include the expected sales levels in units (weighted according to the sales manager’s estimated probabilities), the expected total monetary sales, the expected variable costs, and the expected incremental income. Which price should be chosen?