Remington Colt owns Bloodbath and Beyond, a Nevada based gun dealership, that will participate in an upcoming gun show in Texas. Remington must decide how many Uzi’s to
import for the show from a foreign supplier. He estimates demand for Uzi’s at the gun show to
be
Demand Probability
20 .1
30 .6
40 .3
The guns cost $1,000 each to purchase from the foreign supplier. He will advertise and sell the
Uzi’s for $2,000 each at the show. This gun is illegal in Nevada so, any Uzi’s that don’t sell
during the Texas gun show must be sold to a Texas dealer for $700 each. If he runs out of
foreign purchased Uzi’s at the gun show, Remington will have to procure any needed Uzi’s
from a local Texas dealer for $1,500 each.
a. What is the unit cost of understock and the unit cost of excess (overstock). Find the optimal
percentile and the optimal number to purchase from the foreign supplier.
b. Write the expression for the expected payoff associated with this optimal strategy.