KfUPM Expected Profit vs Order Quantity Risk Management Discussion
Description
Please answer the following question:
In August, the national coffee store Farbucks needs to decide how many holiday-editions insulated coffee mugs to order. Because the mugs are dated, those unsold by January 15 are considered a loss. These premium mugs sell for $25.95 and cost $9.75 each. Farbucks is uncertain of the demand. They believe the market demand is normally distributed with a mean of and a standard deviation of ?. Any unsold mugs are discounted and sold for $5 each. Farbucks are also interested in the opportunity costs which usually happen when demand is unmet. Assume Farbucks assigns $3.00 to each unmet-demand insulated coffee mug as the additional opportunity cost due to future lost sales. For example, if Farbucks ordered 650 mugs and 700 are demanded, 50 mugs are the unmet demand and $150 is the additional opportunity cost. Incorporate this additional cost into your model and attempt the following:
- Build a deterministic model in Excel.
- Simulate the model using @risk and plot a graph for the expected profit vs. order quantity along with the 5th percentile and 95th percentiles profit points. The graph should be similar to the graph in the simulation example excel file (sheet 2). Show the table that has been used to plot the graph.
- Which order policy (Quantity ordered) should be used as per the expectation alone and according to the variability depicted by the profit percentiles?
Note: Please supplement your file with a snapshot of the risk profiles generated at the various order quantity used in your analysis. Each attached risk profile should show the expected profit (add the mean), the 5th percentile, and the 95th percentile of the profit-risk profile.
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