Step 3

Find the optimal stocking level using the relationship of values in the following formula:

x −µ
Z=
8

x − 40
0.25=
8

x=( 0.25 × 80 ) +40

= 42

The optimal stocking is 42. This indicates that Izzy Refreshment Parlor should order 42 plates of
baked spaghetti every day.

The relationship of the optimal stocking level to the average demand is as follows:

1. When the marginal profit (MP) is greater than the marginal loss (ML), the optimal
stocking is higher than the average demand.

2. When the marginal profit (MP) is lesser than the marginal loss (ML), the optimal stock
is lower than the average demand.

In Illustration 7, the MP amounting to P72 is greater than the ML, which is P48. As a result, the
optimal stocking of 42 plates is higher than the average demand of 40.

Illustration 8

Marginal Analysis with a Normal Distribution

Use the same information in Illustration 7, except that the cost of baked spaghetti per plate is
P96

Required. Determine the optimal stocking level of baked spaghetti.

Answer. The values of MP, ML, and P are determined as follows:

MP = 120 - 96 ML = 96 - 0

= P24 = P96
 96
P=
24+ 96

¿ 0.80

Using the standard normal distribution table, where P= 0.80, the Z-score is equal to 0.84.
Figure 5.2 illustrates the area of 0.80. The area to the left of the mean (µ) of the normal
curve distribution has negative Z-scores.

area = 0.80

x µ = 40

optimal stocking level

Figure 5.2

Using the formula for the standard score, the optimal stocking level is determined as follows:

x − 40
− 0.84= x = (-0.84 x 8)+ 40
8

= -7+40 33
= 33

This time, the optimal stocking level is lower than the average demand because the P24
marginal profit is less than the P96 marginal loss.