Chapter 15 Pricing and Revenue Management in a Supply Chain
True/False
1.
Revenue management is the use of marketing to increase the profit generated
from a limited supply of supply chain assets. Answer !alse "ifficulty Moderate #.
Pric Pricin ing g may may infl influe uenc nce e dema demand nd if cust custom omers ers are are pri price ce sens sensit itiv ive. e. Answer $rue "ifficulty Moderate
%.
Reve Revenu nue e mana manage geme ment nt may may als also o &e defi define ned d as the the use use of dif diffe fere rent ntia iall pric pricin ing g &ased on customer segment' time of use' and product or capacity availa&ility to increase supply chain surplus. Answer $rue "ifficulty Moderate
(.
Reve Revenu nue e mana manage geme ment nt ad) ad)us usts ts the the pri prici cing ng and and ava availila& a&le le sup suppl ply y of of asse assets ts to ma*imi+e profits. Answer $rue "ifficulty ,asy
5.
-n the theory ory'' the the conc concep eptt of diff differ eren enti tial al pri prici cing ng dec decre reas ases es tot total al cos costt for for a fir firm. m. Answer !alse "ifficulty Moderate
.
$o dif diffe fere rent ntia iate te &et &etwe ween en the the var vario ious us mar marke kett segm segmen ents ts'' the the firm firm mus mustt eith either er eliminate &arriers that identify product or service attri&utes the segments value differently. Answer !alse "ifficulty ,asy
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-n mos mostt inst instan ance ces s of diff differ eren enti tial al pri prici cing ng'' dema demand nd fro from m the the segm segmen entt payi paying ng the the lower price arises earlier in time than demand from the segment paying the higher price. Answer $rue "ifficulty Moderate
0.
$he $he &asi &asic c trad trade eof offf to &e &e cons consid idere ered d &y the the sup suppl plie ierr with with pro produ duct ctio ion n capa capaci city ty is is &etween committing to an order from a highprice &uyer or waiting for a lower price &uyer to arrive later on. Answer !alse "ifficulty ,asy
2.
Spoilage occurs when the capacity reserved for higher price &uyers is wasted &ecause demand from the higher price segment does not materiali+e. Answer $rue "ifficulty ,asy
13.
4astage occurs if higher price &uyers have to &e turned away &ecause the capacity has already &een committed to lower price &uyers. Answer !alse "ifficulty Moderate
11.
An order from a lower price &uyer should &e accepted if the e*pected revenue from a higher price &uyer is lower than the current revenue from the lower price &uyer. Answer $rue "ifficulty ,asy
1#.
$he amount of the asset reserved for the higher price segment is such that the e*pected marginal revenue from the higher priced segment is less than the price to the lower price segment. Answer !alse "ifficulty ard
1%.
Any asset that loses value over time is perisha&le. Answer $rue "ifficulty ,asy
1(.
6nused capacity from the past is e*tremely valua&le. Answer !alse "ifficulty ,asy
15.
$he tactic of varying price over time is suita&le for assets such as fashion apparel that have a clear date &eyond which they lose a lot of their value. Answer $rue "ifficulty ,asy
1.
,ffective differential pricing over time will generally increase the level of product availa&ility for the consumer willing to pay full price' &ut will decrease total profits for the retailer. Answer !alse "ifficulty Moderate
1/.
$he tactic of over&ooking or overselling the availa&le asset is suita&le in any situation where customers are a&le to cancel orders and the value of the asset drops significantly after a deadline. Answer $rue "ifficulty ,asy
10.
$he &asic tradeoff to consider during over&ooking is &etween having wasted capacity 7or inventory8 &ecause of few cancellations or having a shortage of capacity 7or inventory8 &ecause of e*cessive cancellations. Answer !alse
"ifficulty Moderate 12.
$he cost of wasted capacity is the margin that would have &een generated if the capacity had &een used for production. Answer $rue "ifficulty Moderate
#3.
$he cost of a capacity shortage is the increase in productivity that results from having to go to a &ackup source. Answer !alse "ifficulty Moderate
#1.
$he goal when making the over&ooking decision is to ma*imi+e supply chain profits &y minimi+ing the cost of wasted capacity and the cost of capacity shortage. Answer $rue "ifficulty Moderate
##.
!aced with seasonal peaks' an effective revenue management tactic is to charge a higher price during the peak period and a higher price during offpeak periods. Answer !alse "ifficulty ard
#%.
Shifting demand from peak to offpeak periods is &eneficial if the discount given during the offpeak period is more than offset &y the decrease in cost &ecause of a smaller peak and the increase in revenue during the offpeak period. Answer $rue "ifficulty ,asy
#(.
!irms must decide what fraction of the asset to sell in &ulk and what fraction of the asset to save for destructive testing. Answer !alse "ifficulty ,asy
#5.
$he amount reserved for the spot market should &e such that the e*pected marginal revenue from the spot market e9uals the current revenue from a &ulk sale. Answer $rue "ifficulty Moderate
#.
$he reserved 9uantity will &e affected &y the difference in margin &etween the spot market and the &ulk sale' &ut not the distri&ution of demand from the spot market. Answer !alse "ifficulty Moderate
#/.
6ltimately' a proper understanding of customer preferences and a 9uantification of the impact of various tactics on consumer &ehavior are at the core of successful revenue management. Answer $rue "ifficulty Moderate
#0.
$he forecasting function is not necessary for most revenue management systems. Answer !alse "ifficulty Moderate
#2.
$he goal of optimi+ation is to use forecasts of customer &ehavior to identify a revenue management tactic that will &e most effective. Answer $rue "ifficulty ,asy
%3.
$oo high a level of over&ooking will lead to unutili+ed assets and lost revenue. Answer !alse "ifficulty ,asy
%1.
$oo low a level of over&ooking will lead to unutili+ed assets and lost revenue. Answer $rue "ifficulty ,asy
%#.
Salespeople must understand the revenue management tactic in place so they can align their sales pitch accordingly. Answer $rue "ifficulty ,asy
%%.
Customers will have a negative perception of revenue management tactics if they are simply presented as a mechanism for e*tracting ma*imum revenue. Answer $rue "ifficulty ,asy
Multiple Choice
1.
Pricing can &e used to a. change availa&le supply. &. reduce supply chain costs. c. influence demand if customers are price sensitive. d. all of the a&ove e. a and c only Answer c "ifficulty Moderate
#.
Revenue management is a. the use of marketing tools to increase revenue. &. the use of pricing to increase the profit generated from a limited supply of supply chain assets.
c. a process designed to determine the &est use of funds generated through sales. d. the use of accounting tools to monitor cash flow. e. none of the a&ove Answer & "ifficulty ard %.
$he two forms of supply chain assets are a. capacity and inventory. &. capacity and revenue. c. inventory and revenue. d. inventory and warehouse space. e. none of the a&ove Answer a "ifficulty ,asy
(.
Revenue management may &e defined as a. the use of differential costing &ased on product or capacity availa&ility to decrease supply chain cost. &. the use of differential costing &ased on customer segment' time of use' and product or capacity availa&ility to increase profita&ility. c. the use of differential pricing &ased on customer segment' time of use' and product or capacity availa&ility to decrease supply chain surplus. d. the use of differential pricing &ased on customer segment' time of use' and product or capacity availa&ility to increase supply chain surplus. e. none of the a&ove Answer d "ifficulty Moderate
5.
Revenue management has a significant impact on supply chain profita&ility when which of the following four conditions e*ist: a. $he value of the product varies in different market segments. &. $he product is highly perisha&le or product wastage occurs. c. "emand has seasonal and other peaks. d. $he product is sold &oth in &ulk and the spot market. e. any of the a&ove Answer e "ifficulty ,asy
.
$he use of differential pricing should a. decrease total profits for a firm. &. increase total profits for a firm. c. increase capacity for a firm. d. decrease capacity utili+ation for a firm. e. ;one of the a&ove are true. Answer & "ifficulty Moderate
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4hich of the following are issues that must &e dealt with in order for differential pricing to &e effective: a. $he firm must differentiate &etween the market segments and structure its pricing to make one segment pay more than the other. &. $he firm must control demand such that the lower paying segment does not utili+e the entire availa&ility of the asset. c. $he firm must secure enough capacity to meet demand from each segment. d. all of the a&ove e. a and & only Answer e "ifficulty Moderate
0.
$o differentiate &etween the various market segments' the firm must a. create &arriers &y identifying product or service attri&utes that the segments value differently. &. eliminate &arriers that identify product or service attri&utes that the segments value differently. c. negotiate separately with different market segments that value product or service attri&utes differently. d. develop pricing structures &ased on the volume of various product or service attri&utes. e. none of the a&ove Answer a "ifficulty Moderate
2.
-n most instances of differential pricing' demand from the segment paying the lower price a. arises earlier in time than demand from the segment paying the higher price. &. arises later in time than demand from the segment paying the higher price. c. arises a&out the same time as demand from the segment paying the higher price. d. arises &oth earlier and later in time than demand from the segment paying the higher price. e. none of the a&ove Answer a "ifficulty Moderate
13.
$he &asic tradeoff to &e considered &y the supplier with production capacity is &etween a. committing to an order from a highprice &uyer or waiting for a lower price &uyer to arrive later on. &. committing to an order from a lower price &uyer or waiting for a highprice &uyer to arrive later on. c. allowing the market to &e controlled &y price or capacity. d. having marketing or operations esta&lish the constraints within which orders are accepted. e. none of the a&ove Answer & "ifficulty ,asy
11.
4hen the capacity reserved for higher price &uyers is wasted &ecause demand from the higher price segment does not materiali+e' this is a. spill. &. spoilage. c. wastage. d. e*cess. e. none of the a&ove Answer & "ifficulty Moderate
1#.
-f higher price &uyers have to &e turned away &ecause the capacity has already &een committed to lower price &uyers' this is a. spill. &. spoilage. c. wastage. d. e*cess. e. none of the a&ove Answer a "ifficulty Moderate
1%.
An order from a lower price &uyer a. should always &e accepted rather than waiting for potential revenue from a higher price &uyer . &. should only &e accepted if the e*pected revenue from a higher price &uyer is higher than the current revenue from the lower price &uyer. c. should &e accepted if the e*pected revenue from a higher price &uyer is lower than the current revenue from the lower price &uyer. d. should not &e accepted if the e*pected revenue from a higher price &uyer is lower than the current revenue from the lower price &uyer. e. none of the a&ove Answer c "ifficulty ,asy
1(.
$o successfully use revenue management when serving multiple customer segments' a firm must use which of the following tactics effectively: a. price &ased on the value assigned &y each segment &. use different prices for each segment c. forecast at the segment level d. all of the a&ove e. a and & only Answer d "ifficulty Moderate
15.
$he amount of the asset reserved for the higher price segment is such that a. all orders from the lower priced segment will &e accepted and filled. &. the e*pected marginal revenue from the higher priced segment is more than the price to the lower price segment. c. the e*pected marginal revenue from the higher priced segment is less than the price to the lower price segment. d. the e*pected marginal revenue from the higher priced segment e9uals the price to the lower price segment.
e. none of the a&ove Answer d "ifficulty Moderate 1.
A perisha&le asset is a. something that decays or deteriorates. &. an item that has a short life span. c. any asset that loses value over time. d. all of the a&ove e. none of the a&ove Answer c "ifficulty Moderate
1/.
4hich of the following is not a perisha&le asset: a. fruits and vegeta&les &. high fashion apparel c. computers and cell phones d. production' transportation' and storage capacity that is wasted if not fully utili+ed e. All of the a&ove are perisha&le assets. Answer e "ifficulty Moderate
10.
4hich of the following is 7are8 revenue management tactics appropriate for perisha&le assets: a.
12.
$he tactic of varying price over time is suita&le for assets a. that do not have a clear date &eyond which they lose a lot of their value. &. that have a clear date &eyond which they lose a lot of their value. c. where customers are a&le to cancel orders and the value of the asset drops significantly after a deadline. d. where customers are una&le to cancel orders and the value of the asset drops significantly after a deadline. e. none of the a&ove Answer & "ifficulty Moderate
#3.
,ffective differential pricing over time will generally a. decrease the level of product availa&ility for the consumer willing to pay full price and also decrease total profits for the retailer. &. decrease the level of product availa&ility for the consumer willing to pay full price &ut will increase total profits for the retailer. c. increase the level of product availa&ility for the consumer willing to pay full price and also increase total profits for the retailer.
d. increase the level of product availa&ility for the consumer willing to pay full price &ut will decrease total profits for the retailer. e. none of the a&ove Answer c "ifficulty Moderate #1.
$he tactic of over&ooking or overselling the availa&le asset is suita&le where a. there is a clear date &eyond which the asset loses a lot of its value. &. there is no clear date &eyond which the asset loses a lot of its value. c. customers are a&le to cancel orders and the value of the asset drops significantly after a deadline. d. customers are una&le to cancel orders and the value of the asset drops significantly after a deadline. e. none of the a&ove Answer c "ifficulty Moderate
##.
$he &asic tradeoff to consider during over&ooking is &etween a. having wasted capacity 7or inventory8 or a shortage of capacity 7or inventory8. &. having lost sales or a shortage of capacity 7or inventory8. c. having wasted capacity 7or inventory8 or e*cess capacity 7or inventory8. d. having high sales or a shortage of capacity 7or inventory8. e. none of the a&ove Answer a "ifficulty Moderate
#%.
4asted capacity 7or inventory8 occurs when a. there are e*cessive cancellations. &. there are few cancellations. c. an e*pensive &ackup needs to &e arranged. d. all of the a&ove e. a and c only Answer a "ifficulty ,asy
#(.
A shortage of capacity 7or inventory8 occurs when a. there are e*cessive cancellations. &. there are few cancellations. c. an e*pensive &ackup needs to &e arranged. d. all of the a&ove e. & and c only Answer e "ifficulty ,asy
#5.
$he cost of wasted capacity is a. the reduction in margin that results from having to go to a &ackup source. &. the margin that would have &een generated if the capacity had &een used for production. c. the productivity increase generated when the capacity is used for production. d. the sales potential of e*cess capacity kept in reserve for emergency production.
e. none of the a&ove Answer & "ifficulty Moderate #.
$he cost of a capacity shortage is a. the reduction in margin that results from having to go to a &ackup source. &. the margin that would have &een generated if the capacity had &een used for production. c. the productivity increase generated when the capacity is used for production. d. the sales potential of e*cess capacity kept in reserve for emergency production. e. none of the a&ove Answer a "ifficulty Moderate
#/.
$he goal when making the over&ooking decision is to ma*imi+e supply chain profits &y a. ma*imi+ing the value of wasted capacity and the cost of capacity shortage. &. ma*imi+ing supply chain profits. c. minimi+ing the cost of wasted capacity and the cost of capacity shortage. d. minimi+ing the cost of wasted capacity and minimi+ing capacity shortages. e. none of the a&ove Answer c "ifficulty ard
#0.
An effective revenue management tactic when faced with seasonal peaks is to charge a a. high price during the peak period and a higher price during offpeak periods. &. higher price during the peak period and a lower price during offpeak periods. c. lower price during the peak period and a higher price during offpeak periods. d. low price during the peak period and a lower price during offpeak periods. e. none of the a&ove Answer & "ifficulty Moderate
#2.
Shifting demand from peak to offpeak periods is &eneficial if the discount given a. during the offpeak period is more than offset &y the decrease in cost &ecause of a larger peak. &. during the offpeak period is more than offset &y the decrease in cost &ecause of a smaller peak. c. during the peak period is more than offset &y the decrease in cost &ecause of a smaller peak. d. during the peak period is more than offset &y the decrease in cost &ecause of a larger peak. e. none of the a&ove Answer a "ifficulty Moderate
%3.
Most firms must decide what fraction of an asset to a. sell in &ulk and what fraction of the asset to discard. &. save for the spot market and what fraction of the asset to discard.
c. save for emergencies and what fraction of the asset to rework. d. sell in &ulk and what fraction of the asset to save for the spot market. e. none of the a&ove Answer d "ifficulty Moderate %1.
$he fundamental tradeoff &etween selling in &ulk or on the spot market is a. different from the situation where a firm serves two market segments. &. similar to the case when a firm serves two market segments. c. similar to the case where a firm must deal with seasonal demand. d. similar to the case where a firm has a perisha&le asset. e. none of the a&ove Answer & "ifficulty ard
%#.
$he amount reserved for the spot market should &e a. such that the e*pected marginal revenue from the spot market e9uals the current revenue from a &ulk sale. &. such that the e*pected marginal revenue from the spot market e*ceeds the current revenue from a &ulk sale. c. such that the e*pected marginal revenue from the spot market is less than the current revenue from a &ulk sale. d. e9ual to the ma*imum revenue availa&le from the spot. e. none of the a&ove Answer a "ifficulty ard
%%.
$he reserved 9uantity for the spot market will &e affected &y a. the difference in margin &etween the spot market and the &ulk sale. &. the distri&ution of demand from the &ulk sale. c. the distri&ution of demand from the spot market. d. all of the a&ove e. a and c only Answer e "ifficulty Moderate
%(.
Successful revenue management re9uires a. a proper understanding of customer preferences. &. a 9uantification of the impact of various tactics on consumer &ehavior. c. a clear focus on profita&ility. d. all of the a&ove e. a and & only Answer e "ifficulty Moderate
%5.
$he forecasting function is a. the foundation of any revenue management system. &. unnecessary for a revenue management system. c. an added plus for any revenue management system. d. likely to create pro&lems for any revenue management system. e. none of the a&ove
Answer a "ifficulty Moderate %.
$he goal of optimi+ation in revenue management is to identify a tactic a. using forecasts of customer &ehavior that will &e most effective. &. using linear regression that will ma*imi+e revenue. c. using linear regression that will minimi+e cost. d. that will not have to &e altered. e. none of the a&ove Answer a "ifficulty Moderate
%/.
$he decision to use over&ooking will a. lead to upset customers and a high cost of providing them space. &. lead to unutili+ed assets and lost revenue. c. lead to reduced profits. d. depend upon optimi+ation to &e successful. e. none of the a&ove Answer d "ifficulty Moderate
%0.
$he sales force must understand the revenue management tactic in place a. in order to align their sales pitch accordingly. &. in order to identify those customers who truly need the supply chain asset during the peak period. c. in order to identify those customers that will &enefit from moving their order to the offpeak period. d. all of the a&ove e. a and & only Answer d "ifficulty Moderate
%2.
-t is important for the firm to structure its revenue management program in a way that a. it is presented simply as a mechanism for e*tracting ma*imum revenue. &. revenue increases while improving service along some dimension that is important to customers that pay the highest price. c. profit is ma*imi+ed. d. all of the a&ove e. & and c only Answer & "ifficulty Moderate
(3.
-n order to achieve the greatest value' a. supply planning and revenue management should &e performed separately. &. supply planning should &e completed first. c. supply planning and revenue management should &e com&ined. d. revenue management should &e completed first. e. none of the a&ove Answer c "ifficulty ard
Essay/Problems
1.
"escri&e the role of revenue management. Answer Pricing is an important lever to increase supply chain profits &y &etter
matching supply and demand. Pricing may influence demand if customers are price sensitive. Revenue management is the use of pricing to increase the profit generated from a limited supply of supply chain assets. Supply chain assets e*ist in two forms>capacity and inventory. Capacity assets in the supply chain e*ist for production' transportation' and storage. -nventory assets e*ist throughout the supply chain and are carried to improve product availa&ility. Management decisions should try to ma*imi+e the total margin earned from these assets. $o increase the total margin' managers must use all availa&le levers' including price. $his is the primary role of revenue management. $raditionally' firms have often invested in or eliminated assets to reduce the im&alance &etween supply and demand. !irms &uild additional capacity during the growth part of a &usiness cycle and shut some of the capacity down during a downturn. -deas from revenue management suggest that a firm should first use pricing to achieve some &alance &etween supply and demand' and only then invest in or eliminate assets. Revenue management may also &e defined as the use of differential pricing &ased on customer segment' time of use' and product or capacity availa&ility to increase supply chain surplus. Difficulty: Moderate #.
,*plain how revenue management is &eneficial. Answer: Revenue management ad)usts the pricing and availa&le supply of assets
to ma*imi+e profits. Revenue management has a significant impact on supply chain profita&ility when one or more of the following four conditions e*ist 1. $he value of the product varies in different market segments. 2. $he product is highly perisha&le or product wastage occurs. 3. "emand has seasonal and other peaks. 4. $he product is sold &oth in &ulk and the spot market. Revenue management can &e a powerful tool for every owner of assets in a supply chain. =wners of any form of capacity 7production' transportation' or storage8 can use revenue management if there is seasonal demand or if there are segments that are willing to pay different prices for different lead times to use the capacity. Revenue management can &e effective if there is a segment that wants to use capacity at the last minute and is willing to pay for it' and there is another segment that wants a lower price and is willing to commit far in advance. Revenue management is essential for owners of any perisha&le inventory. Most successful e*amples of the use of revenue management are from the travel and hospitality industry and include airlines' car rentals' and hotels. Revenue management can have a similar impact on all stages of a supply chain that satisfy one or more of these four conditions. Difficulty: Moderate %.
,*plain how differential pricing can &enefit a firm.
Answer: -f a supplier serves multiple customer segments with a fi*ed asset' he or
she can improve revenues &y setting different prices for each segment. -n theory' the concept of differential pricing increases total profits for a firm. $here are two fundamental issues' however' that must &e handled in practice. !irst' the firm must differentiate &etween the two segments and structure its pricing to make one segment pay more than the other. $o differentiate &etween the various segments' the firm must create &arriers &y identifying product or service attri&utes that the segments value differently. Second' the firm must control demand such that the lower paying segment does not utili+e the entire availa&ility of the asset. $he amount of the asset reserved for the higher price segment is such that the e*pected marginal revenue from the higher priced segment e9uals the price to the lower price segment. Prices must &e set with &arriers such that the segment willing to pay more is not a&le to pay the lower price. $o successfully use revenue management when serving multiple customer segments' a firm must use the following tactics effectively ? Price &ased on the value assigned &y each segment. ? 6se different prices for each segment. ? !orecast at the segment level. Difficulty: Moderate (.
ow do firms address the pro&lems of spoilage and spill: Answer: -n most instances of differential pricing' demand from the segment
paying the lower price arises earlier in time than demand from the segment paying the higher price. $he &asic tradeoff to &e considered &y the supplier with production capacity is &etween committing to an order from a lower price &uyer and waiting for a highprice &uyer to arrive later on. $he two risks in such a situation are spoilage and spill. Spoilage occurs when the capacity reserved for higher price &uyers is wasted &ecause demand from the higher price segment does not materiali+e. Spill occurs if higher price &uyers have to &e turned away &ecause the capacity has already &een committed to lower price &uyers. $he supplier should decide on the capacity to commit for the higher price &uyers so as to minimi+e the e*pected cost of spoilage and spill. A current order from a lower price &uyer should &e compared with the e*pected revenue from waiting for a higher price &uyer. $he order from the lower price &uyer should &e accepted if the e*pected revenue from the higher price &uyer is lower than the current revenue from the lower price &uyer. Difficulty: Moderate 5.
ow can firms address the pro&lem of perisha&le assets: Answer: Any asset that loses value over time is perisha&le.
$he two revenue management tactics used for perisha&le assets are 1.
increase the level of product availa&ility for the consumer willing to pay full price and also increase total profits for the retailer. $he tactic of over&ooking or overselling the availa&le asset is suita&le in any situation where customers are a&le to cancel orders and the value of the asset drops significantly after a deadline. -f the cancellation or the return rate can &e predicted accurately' the over&ooking level is easy to determine. -n practice' however' the cancellation or return rate is uncertain. $he &asic tradeoff to consider during over&ooking is &etween having wasted capacity 7or inventory8 &ecause of e*cessive cancellations and having a shortage of capacity 7or inventory8 &ecause of few cancellations' in which case an e*pensive &ackup needs to &e arranged. $he cost of wasted capacity is the margin that would have &een generated if the capacity had &een used for production. $he cost of a capacity shortage is the reduction in margin that results from having to go to a &ackup source. $he goal when making the over&ooking decision is to ma*imi+e supply chain profits &y minimi+ing the cost of wasted capacity and the cost of capacity shortage. Difficulty: Moderate . ,*plain why forecasting is important to revenue management. Answer: $he foundation of any revenue management system is the forecasting function. $o use over&ooking with any degree of success' a firm must &e a&le to forecast cancellation patterns. !orecasting does not mean o&taining an estimate that is always accurate. !orecasting involves estimating demand and also attri&uting an e*pected error to the forecast itself. @oth the estimated value and the e*pected error are important inputs into any revenue management model. !inally' as new information &ecomes availa&le' reforecast to see if the revenue management tactics currently in place are still appropriate. $he fre9uency of forecasting will depend on the amount of market activity. -deally' the forecast and the revenue management decision should &e evaluated after every transaction. Difficulty: Moderate /.
A manufacturer of industrial seals has production capacity of 1'333 units per day. Currently' the firm sells production capacity for 13 per unit. At this price' all production capacity gets &ooked a&out one week in advance. A group of customers have said that they would &e willing to pay 15 per unit if capacity was availa&le on the last day. A&out ten days in advance' demand for the highprice segment is normally distri&uted with a mean of #53 and a standard deviation of 133. ow much production capacity should the manufacturer reserve for the last day: Answer: Revenue from segment A' p A B 15 per unit Revenue from segment @' p@ B 13 per unit Mean demand for segment A' D A B #53 units
Standard deviation of demand for segment A' σ A B 133 units C A B ;=RM-;<71 p@ p A' D A' σ A8 B ;=RM-;<71 D 1315' #53' 1338 B #3.2#/# ≈ #3/ units of capacity Difficulty: Moderate ;ote Access to ,*cel will &e necessary to complete this pro&lem.
