TA B L E

Computation of Total Cost If d $ q 1 1

Cost

Buy q calendars at $2/calendar

Sell d calendars at $4.50/calendar
Total cost

2q
24.50q
22.50q

From (3), Walton should order q* calendars, where q* is the smallest number for which
P(D # q*) $ }32}. As a function of q, P(D # q) increases only when q 5 100, 150, 200,
250, or 300. Also note that P(D # 100) 5 .30, P(D # 150) 5 .50, and P(D # 200) 5
.80. Since P(D # 200) is greater than or equal to }32}, q* 5 200 calendars should be ordered.

REMARKS

1 In terms of marginal analysis, the probability of selling the 200th calendar that is ordered is
P(D $ 200) 5 .50. This implies that the 200th calendar has a 1 2 .50 5 .50 chance of being unsold. Thus, the 200th calendar will increase Waltons expected costs by .50(22.50) 1 .50(1.25) 5
2$0.625. Hence, the 200th calendar should be ordered. On the other hand, the probability that the
201st calendar will be sold is P(D $ 201) 5 .20, and the probability that the 201st calendar will
not be sold is 1 2 .20 5 .80. Therefore, the 201st calendar will increase expected costs by
.20(22.50) 1 .80(1.25) 5 $0.50. Thus, the 201st calendar will increase expected costs and should
not be ordered.
2 In Example 1, co and cu could easily have been determined without recourse to (2) and (2.1).
For example, being one more unit over actual demand increases Waltons costs by 2 2 0.75 5 $1.25.
Thus, co 5 $1.25. Similarly, being one more unit under actual demand will cost Walton 4.50 2 2.00 5
$2.50 in profit. Hence, cu 5 $2.50. If we are able to determine co and cu without using Equations
(2) and (2.1), we should do so. In more difficult problems, however, they can be very useful (see
Examples 2 and 3).

PROBLEMS
Group A
1 In August 2003, a car dealer is trying to determine how
many 2004 models should be ordered. Each car costs the
dealer $10,000. The demand for the dealers 2004 models
has the probability distribution shown in Table 4. Each car
is sold for $15,000. If the demand for 2004 cars exceeds the
number of cars ordered in August, the dealer must reorder
at a cost of $12,000 per car. If the demand for 2004 cars
falls short, the dealer may dispose of excess cars in an endof-model-year sale for $9,000 per car. How many 2004
models should be ordered in August?

TA B L E

No. of Cars
Demanded

20
25
30
35
40

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2 Each day, a news vendor must determine how many

New York Herald Wonderfuls to order. She pays 15 for each
paper and sells each for 30. Any leftover papers are a total
loss. From past experience, she believes that the number of
papers she can sell each day is governed by the probability
distribution shown in Table 5. How many papers should she
order each day?
3 If cu is fixed, will an increase in co increase or decrease
the optimal order quantity?

TA B L E

No. of Papers
Demanded

Probability

50
70
90
110
130

.30
.15
.15
.20
.20

CHAPTER

1 6 Probabilistic Inventory Models

5
Probability

.30
.15
.25
.10
.20

TA B L E

No. of Cells

TA B L E

Probability

50
60
70
80
90
100

Copies Demanded

.20
.15
.30
.10
.15
.10

200
275
350
400
450
500
550
600
650

Week of Birth

Number Needed

36
37
39
40
41
42
43

Probability

.03
.03
.03
.05
.40
.30
.06
.07
.03

4 If co is fixed, will an increase in cu increase or decrease

the optimal order quantity?
5 The power at Ice Station Lion is supplied via solar cells.
Once a year, a plane flies in and sells solar cells to the ice
station at a price of $20 per cell. Because of uncertainty
about future power needs, the ice station can only guess the
number of cells that will be required during the coming year
(see probability distribution in Table 6). If the ice station
runs out of solar cells, a special order must be placed at a
cost of $30 per cell.
a Assuming that the news vendor problem is relevant,
how many cells should be ordered from the plane?
b In part (a), what type of cost is being ignored?
6 The daily demand for substitute teachers in the Los
Angeles teaching system follows the distribution given in
Table 7. Los Angeles wants to know how many teachers to
keep in the substitute teacher pool. Whether or not the
substitute teacher is needed, it costs $30 per day to keep a
substitute teacher in the pool. If not enough substitute teachers
are available on a given day, regular teachers are used to cover
classes at a cost of $54 per regular teacher. How many teachers
should Los Angeles have in the substitute teacher pool?

Group B
7 Every four years, Blockbuster Publishers revises its
textbooks. It has been three years since the best-selling
book, The Joy of OR, has been revised. At present, 2,000

Probability

5,000
6,000
7,000
8,000

TA B L E

TA B L E

Based on Bruno (1970).

.30
.20
.40
.10

9
Probability

.05
.15
.20
.30
.15
.10
.05

copies of the book are in stock, and Blockbuster must

determine how many copies of the book should be printed
for the next year. The sales department believes that sales
during the next year are governed by the distribution in
Table 8. Each copy of Joy sold during the next year brings
the publisher $35 in revenues. Any copies left at the end of
the next year cannot be sold at full price but can be sold for
$5 to Bonds Ennoble and Gitanos bookstores. The cost of
a printing of the book is $50,000 plus $15 per book printed.
How many copies of Joy should be printed? Would the
answer change if 4,000 copies were currently in stock?
8 Vivian and Wayne are planning on going to Lamaze
natural childbirth classes. Lamaze classes meet once a week
for five weeks. Each class gives 20% of the knowledge needed
for natural childbirth. If Vivian and Wayne finish their
classes before the birth of their child, they will forget during
each week 5% of what they have learned in class. To maximize
their expected knowledge at the time of childbirth, during
which week of pregnancy should they begin classes? Assume
that the number of weeks from conception to childbirth
follows the probability distribution given in Table 9.
9 Some universities allow an employee to put an amount
q into an account at the beginning of each year, to be used
for child-care expenses. The amount q is not subject to
federal income tax. Assume that all other income is taxed
by the federal government at a 40% rate. If child-care
expenses for the year (call them d ) are less than q, the
employee in effect loses q 2 d dollars in before-tax income.
If child-care expenses exceed q, the employee must pay the
excess out of his or her own pocket but may credit 25% of
that as a savings on his or her state income tax.
Suppose Professor Muffy Rabbit believes that there is an
equal chance that her child-care expenses for the coming
year will be $3,000, $4,000, $5,000, $6,000, or $7,000. At
the beginning of the year, how much money should she
place in the child-care account?

Based on Rosenfeld (1986).

1 6 . 3 The News Vendor Problem: Discrete Demand

885