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Lemington’s is trying to determine how many Jean Hudson dresses to order for the spring season. Demand for the dresses is assumed to follow a normal distribution with mean 400 and standard deviation 100. The contract between Jean Hudson and Lemington’s works as follows. At the beginning of the season, Lemington’s reserves x units of capacity. Lemington’s must take delivery for at least 0.8 x dresses and can, if desired, take delivery on up to x dresses. Each dress sells for $160 and Hudson charges $50 per dress. If Lemington’s does not take delivery on all x dresses, it owes Hudson a $5 penalty for each unit of reserved capacity that is unused. For example, if Lemington’s orders 450 dresses and demand is for 400 dresses, Lemington’s will receive 400 dresses and owe Jean 400($50) + 50($5). How many units of capacity should Lemington’s reserve to maximize its expected profit?

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Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

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Chapter
Section
BuyFindarrow_forward

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659
Chapter 10, Problem 35P
Textbook Problem
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Lemington’s is trying to determine how many Jean Hudson dresses to order for the spring season. Demand for the dresses is assumed to follow a normal distribution with mean 400 and standard deviation 100. The contract between Jean Hudson and Lemington’s works as follows. At the beginning of the season, Lemington’s reserves x units of capacity. Lemington’s must take delivery for at least 0.8x dresses and can, if desired, take delivery on up to x dresses. Each dress sells for $160 and Hudson charges $50 per dress. If Lemington’s does not take delivery on all x dresses, it owes Hudson a $5 penalty for each unit of reserved capacity that is unused. For example, if Lemington’s orders 450 dresses and demand is for 400 dresses, Lemington’s will receive 400 dresses and owe Jean 400($50) + 50($5). How many units of capacity should Lemington’s reserve to maximize its expected profit?

Summary Introduction

To determine: The number of units of capacity that Person L should reserve to maximize the profit.

Introduction: Simulation model is the digital prototype of the physical model that helps to forecast the performance of the system or model in the real world.

Explanation of Solution

Formulae to determine the above table:

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Chapter 10 Solutions

Practical Management Science
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