Airport rent-a-car is a locally operated business in competition with serveral major firms.

ARC is planning a new deal for customers who want to rent a car for only one day and return
it to the airport. For $24.95, the company will rent a small economy car to a customer, whose
only other expense is to fill the car with gas at the day's end. ARC is planning to buy a
number of small cars from the manufacturer at a reduced price of $6,750 per car. To simplify
things, ARC is considering only three options: buy 10, buy 12 or buy 15 cars. The big
question is how many to buy. Company executives have decided on the following estimated
probabilty distribution of the customer demand for rental cars each day: *Customer demand
10 11 12 13 *Probability 0.10 0.40 0.30 0.20 The company antipates that its variable cost per
car per day will be $2.25. After using the cars for 1 year, ARC expects to sell them and
recapture 45 percent of the original cost. That means 55 percent of the $6,750 cost of each car
must be recovered from customers in addition to the variable costs. This works out to an
additional cost of $11.90 per day. 1. Prepare a payoff table. Each payoff should represent an
amount per day. 2. Determine the optimal number of cars for ARC to buy.
Revenue from renting 1 car = $24.95
Total cost of maintaining 1 car = $11.90+$2.25 = $14.15
Profit from buying 10 cars when the demand is 10 cars = $24.95*10 - $14.15*10
= $249.50-$141.50 = $108
The following table gives various combinations
Dema
nd

Buy

Rente
d

Reven
ue

10

10

10 249.50

10

11

10 249.50

10

12

10 249.50

10

13

10 249.50

12

10

10 249.50

12

11

11 274.45

12

12

12 299.40

12

13

12 299.40

15

10

10 249.50

15

11

11 274.45

15

12

12 299.40

15

13

13 324.35

Cost
Profit
141.5 108.0
0
0
141.5 108.0
0
0
141.5 108.0
0
0
141.5 108.0
0
0
169.8
0 79.70
169.8 104.6
0
5
169.8 129.6
0
0
169.8 129.6
0
0
212.2
5 37.25
212.2
5 62.20
212.2
5 87.15
212.2 112.1
5
0

The following is the payoff (profit) table

Probability
Demand
Buy 10 cars

0.10
10
108.0
0

Buy 12 cars

79.70

0.40
11
108.0
0
104.6
5

Buy 15 cars

37.25

62.20

0.30
12
108.0
0
129.6
0
87.15

0.20 Expected
13 payoff
108.0
0
108.00
129.6
0
114.63
112.1
0
77.17

Expected payoff when 10 cars are bought =

108.00*0.10+108.00*0.40+108.00*0.30+108.00*0.20 =108.00
Expected payoff when 12 cars are bought =
79.70*0.10+104.65*0.40+129.60*0.30+129.60*0.20 =114.63
Expected payoff when 15 cars are bought =
37.25*0.10+62.20*0.40+87.15*0.30+112.10*0.20 =77.17
The expected payoff is maximum when 12 cars are bought.
The optimal number of cars to buy is 12