Question

Famous Fabricators has the opportunity to supply their customer Service Systems with a key component of the model K47 known as the power core housing. Given the short amount of time available to complete the order, Famous Fabricators only has one opportunity to purchase the raw materials to make the power core housing. The raw materials cost $180 and the profit for selling a power core housing to Service Systems is $260. The exact number of power core housings that Service Systems will purchase is uncertain but follows the distribution given below. Demand Probability 12 0.10 14 0.18 16 0.29 18 0.31 20 0.12 a. Given the information above, how many power core housings do you recommend Famous Fabricators produce if their objective is to maximize their expected profit? Why?

Answer 1

To maximize their expected profit, Famous Fabricators should produce 18 power core housings.

Step-by-step explanation:

To maximize their expected profit, Famous Fabricators should produce the number of power core housings that will yield the highest expected profit. This can be determined by calculating the expected profit for each possible quantity and choosing the quantity with the highest expected profit. First, we calculate the expected profit for each quantity using the formula:

Expected Profit = (Profit * Demand Probability) - Raw Material Cost

Then, we compare the expected profit for each quantity and choose the quantity with the highest expected profit. In this case, the calculation yields the highest expected profit with a production quantity of 18 power core housings.