You are considering adding a new food product to your store for resale. You are certain that, in a month, minimum demand for the product will be 6 units, while maximum demand will be 8 units
(Unfortunately, the new product has a one-month shelf life and is considered to be waste at the end of the month.) You will pay $60/unit for this new product while you plan to sell the product at a $40/unit profit. The estimated demand for this new product in any given month is 6 units(p=0.1 ), 7 units(p=0.4 ), and 8 units(p=0.5 ). Using EMV analysis, how many units of the new product should be purchased for resale?
EMV(purchase 6 for resale) = 6(40 )(0.1 ) + 6(40 )(0.4 ) + 6(40 )(0.5 ) = 240
EMV(purchase 7 for resale) = [6(40 ) - 60](0.1 ) + 7(40 )(0.4 ) + 7(40 )(0.5 ) = 270
EMV(purchase 8 for resale) = [6(40 ) - 2(60 )](0.1 ) + [7(40 ) - 60](0.4 ) + 8(40 )(0.5 ) = 260
Choose to purchase 7 units for resale (largest EMV)
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