Question

Orders for clothing from Sky manufacturer for this year's National Day’s season must be placed in June. The cost per unit for a particular dress is $10 while the anticipated selling price is $25. Demand is projected to be 25, 30, or 35 units.

There is:

• A 40 percent chance that demand will be 25 units;

• A 50 percent chance that demand will be 30 units; and

• A 10 percent chance that demand will be 35 units.

The company believes that any leftover goods will have to be scrapped.

Required:

Prepare a payoff table, and calculate how many National Day’s dresses should be ordered in June?

Answer 1

Cost per unit is $10
Selling price is $25
Profit is $25-$10=$15
Payoff table	Expected Demand
Order amount	25	30	35
Probability	0.4	0.5	0.1
25	25*$15=$375	25*$15=$375	25*$15=$375
30	25*15+(30-25)*(-10)=$325	30*15=$450	30*15=$450
35	25*15+(35-25)*(-10)=$275	30*15+(35-30)*(-10)= $450	35*15=$525

Use probability for each demand, we will calculated the Expected monetary value (EMV) in case of each order quantity

EMV (Order = 25)= 375*0.4+375*0.4+375*0.1 = $375

EMV (Order = 30)= 325*0.4+450*0.4+450*0.1 = $355

EMV (Order = 35)= 275*0.4+450*0.4+525*0.1 = $342.5

EMV is highest for order quantity of 25 hence "25 dresses" should be ordered in Junee.