A manager is going to purchase new processing equipment and must decide on the number of spare parts to order with the new equipment. The spares cost $200 each, and any unused spares will have an expected salvage value of $50 each. The probability of usage can be described by this distribution:

Number 0 1 2 3 Probability .10 .50 .25 .15 If a part fails and a spare is not available, two days will be needed to obtain a replacement and install it. The cost for idle equipment is $500 per day. What quantity of spares should be ordered?

a. Use the ratio method.

b. Use the tabular method (see Table 12.3). LO.1