Unfortunately, because of the delicate fresh dairy ingredients, Sweet Revenge must be served on the day it is made. This presents a problem for the owner, because he has to instruct the chef on how many Sweet Revenges to prepare each day. The owner and great-grandson, Martin Quinn, determined that the contribution to fixed costs and profit from each serving of Sweet Revenge is $2.95. This is based on a menu price of $3.95 minus a cost of $1.00 to produce. Quinn believes that stocking out of Sweet Revenge hurts the reputation of the restaurant. While he feels that it might be difficult to prove, he thinks that stocking out of the dessert might be acceptable to 80 percent of the customers. He also believes that 20 percent of the people would be seriously upset by the situation. He estimates that one-half of these persons would be upset enough not to come back to the Last Resort for some period. The loss of business from this group would be roughly $20 per each disappointed person. The other one-half of the disappointed group would decide never to come back. The present value of lost future business for this group is estimated to be $100 per each disappointed person

1. Assuming that the cost of stockout is the lost contribution of one dessert, how many portions of Sweet Revenge should the chef prepare each weekday?

2. Based on Martin Quinns estimate of other stockout costs, how many servings should the chef prepare?

3. If, historically, desserts were prepared to cover 95 percent of demand, what was the implied stockout cost?

TABLE 15.6 Weekday Demand for Sweet Revenge TABLE 15.6 Weekday Demand for Sweet Revenge