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Question 4: [13 marks] Lingnan Bakery (LB) also makes cream cakes. Cream cakes cost $75 each to make, and LB sells for $250 each. Every
Question 4: [13 marks] Lingnan Bakery (LB) also makes cream cakes. Cream cakes cost $75 each to make, and LB sells for $250 each. Every day, 2 hours before the bakery is closed, those unsold cream cakes are reduced to half-price of the regular price of $250 and typically 50% of those are sold. Any that unsold on the day are discarded. The daily demand of cream cakes can be approximated by a normal distribution with =50 cakes and s=5 cakes. a. What inventory model should be used to determine the quantity of cream cakes prepared daily in order to maximize the total expected daily profit? Why? [3 marks] b. What is the critical ratio (optimal service level)? [5 marks] c. How many cream cakes should be prepared daily to maximize the total daily expected profit of this product? [5 marks]
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