262 Appendix 6.1 Chapter & Continuous Prabebilty Diribuions to high levels and large profits can be realized, However, new toys can also flop, lea Specialty stuck with high levels of inventory that must he sold at reduced prices. The mo ing importaat question the company faces is deciding bow many units of & new toy should purchased to meet anticipated sales demand, If to few are purchased, sales will be lost: fig, ‘many are purchased, profits will be reduced because of low prices realized in clearance sale, For the coming season, Specialty plans to introduce a new product called We ‘Teddy. This variation of a talking teddy bear is made by a company in Taiwan. When achily presses Teddy's hand, the bear begins to talk. A built-in barometer selects one of five re. sponses that predict the weather conditions. The responses range from “It looks to be ayy nice day! Have fun” (o “I think it may rain today. Don't forget your umbrella.” Tests with the product show that, even though itis not a perfect weather predictor, its predictions ae surprisingly good. Several of Specialty’s managers claimed Teddy gave predictions afte ‘weather that were as good as many local television weather forecasters, AS with other products, Specialty faces the decision of how many Weather Teddy miss to order for the coming holiday season. Members of the management team suggested oe der quantities of 15,000, 18,000, 24,000, or 28,000 units. The wide range of order quant fies suggested indicates considerable disagreement concerning the market potesil, ‘The product management team asks you for an analysis of the stock-out probabilities foc \yarious order quantities, an estimate ofthe profit potential, and to help make an order quan, tity recommendation, Specialty expects to sell Weather Teddy for $24 based on a cost of $16 per unit, inventory remains after the holiday season, Specialty will sel all surplus in ventory for $5 per unit, After reviewing the sales history of similar products, Specialty’ e- nior sales forecaster predicted an expected demand of 20,000 units with a .95 probability that demand would be between 10,000 units and 30,000 units, Managerial Report Prepare a managerial report that addresses the following issues and recommends an order ‘quantity for the Weather Teddy product, 1. Use the sales forecaster’s prediction to describe a normal probability distribution that can be used to approximate the demand distribution. Sketch the distribution and show its mean and standard deviation, 2 Compute the probability of a stock-out for the order quantities suggested by mem- bers of the management tear. 3. Compute the projected profit for the order quantities suggested by the management team under three scenarios: worst case in which sales = 10,000 units, most likely cease in which sales = 20,000 units, and best case in which sales = 30,000 units 4. One of Specialty’s managers fet that the profit potential was so great that the onder quantity should have a 70% chance of meeting demand and only 2 30% chance of any stock-outs. What quantity would be ordered under this poliey, and what isthe projected profit under the three sales scenarios? 5. Provide your own recommendation for an order quantity and note the associated profit projections. Provide a rationale for your recommendation. Continuous Probability Distributions with Minitab Lets demonstrate the Minitab procedure for computing continuous probabilities by refer- ring to the Great Tite Company problem where tire mileage was described by a normal dis- \wibution with 1 = 36,500 and c= 5000. One question asked was: What is the probsbility that the tite mileage will exceed 40,000 miles?ne of five tobe vey A Tet edicts ye ston ofthe r Teddy unig negested op order quant et potenti babies fr order quan OM a cost of Hl surplus in- reciaty'sse. probability nds an order distribution rbution and ed by ment- nanagement most likely 00 units atthe order é chance of what isthe associated s by refer jormal dis scobability Appendic 4.2. Confinvovs Probability Distributions with Exoal 263 For continuous probability distributions, Minitab gives a cumulative probability: thst js, Minitab gives the probability that the random variable will assume a value less than or equal to a specified constant, For the Grear tie mileage question, Minitab can be used (0 Getesmine the cumulative probability that the tre mileage will be less then or equal (0 40,000 miles. (The specified constant in this ease is 40,000.) After obvaining the eumaulé- tive probability from Minitab, we must subtract it from 1 to determine the probability that the tice mileage will exceed 40,000 miles. Prior to using Minitab to compute a probability, one must enter the specified constant {nto.a column of the worksheet. For the Great tire mileage question we entered the specified ‘constant of 40,000 into column C1 of the Minitab worksheet. The steps in using Minitab co ‘compute the cumulative probability of the normal random variable assuming a value less than or egual 10 40,000 follow Step 1. Select the Cale mena Step 2. Choose Probability Distributions Step 3. Choose Normal Step 4. When the Normal Distribution dialog box appears: ‘Select Cumulative probability Enter 36500 in the Mean box Enter 5000 in the Standard deviation box Enter C1 in the Input column box (the column com Click OK ‘After the userclicks OK, Minitab prints the cumulative probability that the normal ran- dom variable assumes a value less than or equal to 40,000, Minitab shows that this proba- bility is. 7580. Because we are interested in the probability that the tire mileage will be greater than 40,000, the desired probability is 1 ~ .7580 = 2420. ‘A second question in the Grear Tire Company problem was: What mileage guarantee should Grear set to ensire that no more than 10% of the tires qualify for the gaurantee’? Here we are given a probability and wan to find the corresponding value forthe random vari- able. Minitab uses an inverse calculation routine to find the value of the rankiom variable asso ‘ated with a given cumulative probability. First, we must enter the cumulative probability into ‘column of the Minitab worksheet (say, C1) Inthis case, the desired cunnutative probability is 10. Then, the fist tree steps ofthe Minitab procedure are as already listed. In step 4, we se ject Inverse cumulative probability insicad of Cumulative probability and complete the e- ‘pars of the step. Minitab then displays the mileage guarantee of 30,092 miles. Minitab is capable of computing probabilities for other continuous probability distributions, including the exponential probability distribution. To compute exponential probebilties, follow the procedure shown previously forthe normal probability distribu tion and choose the Exponential option in step 3. Step 4 is as shown, with the exception thatentering the standard deviation is notrequired. Output for cumulative probabilities and jnverse cumulative probabilities is identical to that deseribed for the normal probability ning 40,000) disuibution. x62 Continuous Probability Distributions with Excel Appent [Excel provides the capability for computing probabilities for several continuous probability istributions, including the normal and exponential probability distributions, fn this appen- tix, we describe how Excel can be used to compute probabilities for any normal distribu tion. The procedures forthe exponential and other continuous distributions are similar to the one we deseribe for the normal distribution264 Chapter 6 Continuous Probability Distributions Let us return to the Grear Tire Company problem where the tire mileage was describe by a notin distribution with 2 = 36,500 and o = S000. Assume we are interested in the probability that tire mileage will exceed 40,000 miles, Excel's NORMDIST function provides cumulative probabilities for a nommal distiba. tion, The general form of the function is NORMDIST (xz,d,cumulative). For the font, argument, TRUE is specified if a cumulative probability is desired. Thus, to compute the ‘cumulative probability thatthe tire mileage will be less than or equal to 40,000 miles we ‘would enter the following formula into any cell of an Excel worksheet NORMDIST(-#0000,36500,S000,TRUE) At this point, 7580 will appear in the cell where the formula was entered, indicating thi ‘the probability of tire mileage being less than or equal to 40,000 miles is .7580. Therefore, the probability that tire mileage will exceed 40,000 miles is 1 ~ .7580 = .2420, Excel’s NORMIN function uses an inverse computation t find the x value come sponding toa given cumulative probability. For instance, suppose we want to find the gar. anteed mileaze Grear should offer so that no more than 10% of the tires will be cl the guarantee, We would enter the following formula into any cell of gible for 'xcel worksheet: =NORMINV(.1,36500,5000) Ac this point, 30092 will appear in the cell where the formula was entered, indicating that the probability ofa tire lasting 30,092 miles or less is .10, The Excel function for computing exponential probabilities is EXPONDIST. Using itis straightforward. But if one needs belp specifying the proper values for the arguments, Excel's Insert Function dialog box can be used (sce Appendix E).