2 A Mercedes dealer must pay $20,000 for each car purchased. The annual holding cost is estimated to be 25%

of the dollar value of inventory. The dealer sells an average of 500 cars per year. He believes that demand is backlogged but estimates that if he is short one car for one year he will lose $20,000 worth of future profits. Each time the dealer places an order for cars, ordering cost amounts to $10,000.

Determine the Mercedes dealer’s optimal ordering policy.

What is the maximum shortage that will occur?