The campus bookstore sells highlighters that it purchases by the case. Cost per case, including shipping and handling, is $200. Revenue per case is $350. Any cases unsold will be discounted and sold at $175

The bookstore has estimated that demand will follow the pattern below

Demand level Probability
10 cases 20 percent
11 cases 20 percent
12 cases 40 percent
13 cases 15 percent
14 cases 5 percent

a. Construct the bookstore's payoff table.
b. How many cases should the bookstore stock in order to maximize expected profit?
c. How would your answer differ if the clearance price were not $175 per case but $225 per case? (It is not necessary to re-solve the problem to answer this.)

(a) The Excel OM table is below.
(b) The highest EMV is 1705, from stocking 13 cases.
(c) If the clearance price exceeds the case cost, there will be no disincentive to stocking the maximum demand level, 14 cases.

Profit Demand 10 Demand 11 Demand 12 Demand 13 Demand 14 EMV
Probability 0.2 0.2 0.4 0.15 0.05
Stock 10 1500 1500 1500 1500 1500 1500
Stock 11 1475 1650 1650 1650 1650 1615
Stock 12 1450 1625 1800 1800 1800 1695
Stock 13 1425 1600 1775 1950 1950 Maximum 1705
Stock 14 1400 1575 1750 1925 2100 1688.75