Question

Burger Prince buys top-grade ground beef for $1.00 per pound. A large sign over the entrance guarantees that the meat is fresh daily. Any leftover meat is sold to the local high school cafeteria for 80 cents per pound. Four hamburgers can be prepared from each pound of meat. Burgers sell for 60 cents each. Labor, overhead, meat, buns, and condiments cost 20 cents per burger. Demand is normally distributed with a mean of 200 pounds per day and a standard deviation of 50 pounds per day. What daily order quantity is optimal? (Hint: Shortage cost must be in dollars per pound.) 3.

Answer 1

Excess cost Ce 1-0.80 = 0.20

Shortage cost is the profit foregone Cs = 4*0.6 - 1- 4*0.20= 0.60

Optimal service level Cs/(Cs+ Ce)

Sl = 0.60/(0.60+0.20)= 0.75

Optimal order quantity NORMINV(0.75,200,50)= 233.72