Ahmed De Alba Garza

HW3

9-

The Crestview Printing Company prints a particularly popular Christmas card once a year and
distributes the cards to stationery and gift shops throughout the United States. It costs Crestview
50 cents to print each card, and the company receives 65 cents for each card sold.

Because the cards have the current year printed on them, those cards that are not sold are
generally discarded. Based on past experience and forecasts of current buying patterns, the
probability distribution of the number of cards to be sold nationwide for the next Christmas season
is estimated to be

Quantity Pro

m
sold b

er as
100k-150k .10

co
150k-200k .15

eH w
200k-250k .25

o.
250k-300k .20
300k-350k .15 rs e
ou urc
350k-400k .10
400k-450k .05
o

Determine the number of cards that Crestview should print this year.
aC s
vi y re

Co
F ( Q )=
Cu+Co
ed d

Cu (overage cost) = $0.50

ar stu

Co (underage cost) = $0.65 - $0.50 = $0.15

F(Q) = (0.15)/(0.65) = .23076 ≈ .231

is

Quantity Pro Cum Test Test Result

sold b .
Th

prob
100k-150k .10 .10 >Critica NO
l ratio
sh

150k-200k .15 .25 >Critica YES Optimal Stock

l ratio
200k-250k .25 .50
250k-300k .20 .70
300k-350k .15 .85
350k-400k .10 .95

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 400k-450k .05 1.00

Q= [(.231-.10)/(.25-.10)]*50,000 + 150,000 = 193,667.

10-

Happy Henry’s car dealer sells an imported car called the EX123. Once every three months, a
shipment of the cars is made to Happy Henry’s. Emergency shipments can be made between these
three-month intervals to resupply the cars when inventory falls short of demand. The emergency
shipments require two weeks, and buyers are willing to wait this long for the cars, but will
generally go elsewhere before the next three-month shipment is due. From experience, it appears
that the demand for the EX123 over a three-month interval is normally distributed with a mean of
60 and a variance of 36. The cost of holding an EX123 for one year is $500. Emergency shipments
cost $250 per car over and above normal shipping costs.

m
er as
μ = 60

co
eH w
σ = 6 (square root of 36)

o.
Emergency shipment cost = $250
rs e
a. How many cars should Happy Henry’s be purchasing every three months?
ou urc
We have to find first the critical ratio:

Co
o

F ( Q )=
Cu+Co
aC s
vi y re

Co = $250  Cost of emergency shipping

Cu = $500/4 = $125  cost of handling for a year divided by number of periods (4), since the
ed d

shipments are every 3 months.

ar stu

F(Q)=(250/(250+125)) = .6666 ≈ .667

From the Z table of normal distribution .667 corresponds to Z= 0.44

is

So,
Th

Q=σz+ μ

= (6*0.44) + 60
sh

= 62.64 ≈ 63 cars.

b. Repeat the calculations, assuming that excess demands are back-ordered from one three-
month period to the next. Assume a loss-of-goodwill cost of $100 for customers having to
wait until the next three-month period and a cost of $50 per customer for bookkeeping
expenses.

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 Cu = $125

Co = $150

Co
F ( Q )=
Cu+Co

= 0.5454

From the Z table of normal distribution .5454 corresponds to Z= 0.11

Q=σz+ μ

= (6*0.11)+60 = 60.66 ≈ 61 cars.

c. Repeat the calculations, assuming that when Happy Henry’s is out of stock of EX123s, the

m
er as
customer will purchase the car elsewhere. In this case, assume that the cars cost Henry an
average of $10,000 and sell for an average of $13,500. Ignore loss-of-goodwill costs for this

co
eH w
calculation.

o.
Cu = $125
rs e
Co = $13,500 - $10,000 = $3,500
ou urc
Co
F ( Q )=
Cu+Co
o
aC s

F(Q) = (3,500/(3,500+125) = .9655

vi y re

From the Z table of normal distribution .9655 corresponds to Z= 1.82

Q=σz+ μ
ed d

= (6*1.82) + 60 = 70.92 ≈ 71 cars.

ar stu

11-

Irwin’s sells a particular model of fan, with most of the sales being made in the summer months.
is

Irwin’s makes a one-time purchase of the fans prior to each summer season at a cost of $40 each
Th

and sells each fan for $60. Any fans unsold at the end of the summer season are marked down to
$29 and sold in a special fall sale. Virtually all marked-down fans are sold. The following is the
number of sales of fans during the past 10 summers: 30, 50, 30, 60, 10, 40, 30, 30, 20, 40.
sh

a. Estimate the mean and the variance of the demand for fans each summer.

Mean is 34, variance is ≈204.44 (check excel sheet)

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 b. Assume that the demand for fans each summer follows a normal distribution, with mean
and variance given by what you obtained in part (a). Determine the optimal number of
fans for Irwin’s to buy prior to each summer season.
First we calculate the critical ratio:
Co= 60 – 40 = 20
Cu= 40-29 = 11
So critical ratio is:

Co
F ( Q )=
Cu+Co

So F(Q)= 20/(20+11) = .64516 ≈ .6452

From the Z table of normal distribution .6452 corresponds to Z= .375 ≈ .38

Q=σz+ μ

m
er as
Q = (≈14.30)(.38) + 34

co
eH w
Q = 39.434 ≈ 39  Fans that should be bought.

o.
c. Based on the observed 10 values of the prior demand, construct an empirical probability
rs e
distribution of summer demand and determine the optimal number of fans for Irwin’s to
ou urc
buy based on the empirical distribution.

occurrence Relative freq Cum.

o

s Freq
aC s

1 1 1 1
vi y re

0
2 1 1 2
0
3 4 4 6
ed d

0
ar stu

4 2 2 8
0
5 1 1 9
0
is

6 1 1 1
Th

Our value (39) lies between our third and fourth category so using empirical distribution
we should buy 40
sh

d. Based on your results for parts (b) and (c), would you say that the normal distribution
provides an adequate approximation?
I think so, the difference was off by just a little bit.

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 21. Consider the Crestview Printing Company mentioned in Problem 9. Suppose that Crestview
wishes to produce enough cards to satisfy all Christmas demand with probability 90 percent. How
many cards should they print? Suppose the probability is 97 percent. What would you recommend
in this case? (Your answer will depend upon the assumption you make concerning the shape of the
cumulative distribution function.)

Quantity Pro Cum

sold b .
prob
100k-150k .10 .10
150k-200k .15 .25
200k-250k .25 .50
250k-300k .20 .70
300k-350k .15 .85
350k-400k .10 .95
400k-450k .05 1.00

m
If the probability considered is at 90%, we know that the 300k-350k bracket ends at 85%

er as
cumulative and the next one ends at 95%, so 90% should be the midpoint from that bracket. Half

co
of $50,000 is $25,000 so 350k plus 25k is $375,000 based on cumulative probability.

eH w
If the probability considered is at 97%, we know that the 350k-400k bracket ends at 95%

o.
rs e
cumulative and the next one ends at 100%, so 97% should be two fifths from that bracket. Two
ou urc
fifths of $50,000 is $20,000 so 400k plus 20k is $420,000 based on cumulative probability.
o

33-
aC s

Semicon is a start-up company that produces semiconductors for a variety of applications. The
vi y re

process of burning in the circuits requires large amounts of nitric acid, which has a shelf life of only
three months. Semicon estimates that it will need between 1,000 and 3,000 gallons of acid for the
next three-month period and assumes that all values in this interval are equally likely. The acid
ed d

costs them $150 per gallon. The company assumes a 30 percent annual interest rate for the money
ar stu

it has invested in inventory, and the acid costs the company $35 a gallon to store. (Assume that all
inventory costs are attached to the end of the three-month period.) Acid that is left over at the end
of the three-month period costs $75 per gallon to dispose of. If the company runs out of acid
during the three-month period, it can purchase emergency supplies quickly at a price of $600 per
is

gallon.
Th

a. How many gallons of nitric acid should Semicon purchase? Experience with the
marketplace later shows that the demand is closer to a normal distribution, with mean
1,800 and standard deviation 480.
sh

First we get the probability ratio

Cu
P=
Co+Cu

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 Cu = Underage cost; Emergency shipment cost = $600 - $150 = $450

Co = Overage cost = $150 + $(.3*150/4) + $35 + $75 = $271.25

So F(Q) = 450/(450+271.25) = .62391

Now we use the formula:

Q=a+ P(b−a)

So Q = 1000 + (0.6239)(3000 – 1000) = 2247.8 ≈ 2248 gallons of nitric acid.

b. Suppose that now Semicon switches to a 94 percent fill rate criterion. How many gallons
should now be purchased at the start of each three-month period?

If the fill rate criterion is 94%, n(Q) = 1-.94 = .06

m
So,

er as
n(Q) μ

co
L ( z )=

eH w
σ

o.
rs e
L(z) = 0.06*1800/480 = 0.225
ou urc
o
aC s
vi y re

.2236 is the value from the appendix table and that one is the closest one to .225 and the Z value
that corresponds to it is .42.
ed d

So now we just plug into out formula,

ar stu

Q=σz+ μ

Q = (480*.42) + 1800 = 2001.6 ≈ 2002 gallons should be purchased.

is
Th

37-

A large national producer of canned foods plans to purchase 100 combines that are to be
sh

customized for its needs. One of the parts used in the combine is a replaceable blade for
harvesting corn. Spare blades can be purchased at the time the order is placed for $100 each, but
will cost $1,000 each if purchased at a later time because a special production run will be required.
It is estimated that the number of replacement blades required by a combine over its useful
lifetime can be closely approximated by a normal distribution with mean 18 and standard deviation

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 5.2. The combine maker agrees to buy back unused blades for $20 each. How many spare blades
should the company purchase with the combines?

First we find the critical ratio:

Co
F ( Q )=
Cu+Co

Cu = $100 - $20 = $80

Co = $1000 - $100 = $900

So F(Q) = 900/(900+80) = .91836 ≈ .9184

From the Z table of normal distribution .6452 corresponds to Z= 1.39

Since,

m
σ = 5.2

er as
μ = 18

co
eH w
Q = (5.2)(1.39) + 18 = 25

o.
rs e
The company should buy 25 blades.
ou urc
45-
o

The Poisson distribution is discussed in Appendix 5–D at the end of this chapter. Assume that the
aC s

distribution of bagels sold daily at Billy’s Bakery in Problem 8 follows a Poisson distribution with
vi y re

mean 16 per day. Using Table A–3 in the back of the book or the Poisson distribution function built
into Excel, determine the optimal number of bagels for Billy’s to bake each day.

To get out X for Poisson distribution we look for the critical ratio
ed d
ar stu

Co
F ( Q )=
Cu+Co
is

Cu = .08 - .03 = .05

Th

Co = .35 - .08 = .27

F(Q) = .84375

Since the ratio represents F(X) on the table, the values we see 1-F(X) so since 1-.84375= .15625.
sh

This number lies between .1878 and .1318 and by subtracting those numbers from .15625 and
taking the absolute value, we see that it is closer to .1318 which corresponds to 21 bagels. I tried
to use the excel function but I cannot make it work backwards to get X (value inputted) so I used
the table instead.

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 m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

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