Anew edition of a textbook is scheduled to be published a year from now. the publisher currently has 2000 copies of the current edition on hand, and is deciding whether to do another printing before the new edition comes out. the publisher estimates that demand for the book during the next year is governed by the probability distribution shown below:
demand
3000
4000
6000
8000
1
probability
0.20
0.40
0.10
0.20
0.10
a production run incurs a fixed cost of $10,000 plus a variable cost $15 per book printed. books are sold for $130 per copy. any demand that cannot be met incurs a penalty cost of $20 per book, due to the loss of goodwill. up to 500 of any leftover books can be sold to a discount bookstore for $35 per book. the publisher is interested in maximizing expected profit. the following print run sizes are under consideration: 0 (no production run) to 16000 in increments of 2000. the publisher wants to determine the size of the print run through simulation. (that is, the publisher wants to determine how many copies of the current edition should be printed before the new edition comes out.)
tasks:
construct a simulation model in @risk® and run 1000 simulation runs for the production quantities mentioned above (namely; 0, 2000, 4000, 6000, 8000, 10,000, 12,000, 14,000 and 16,000) to determine the optimal production quantity. record and report the average, minimum, maximum, and standard deviation of the profit for each production quantity.
make recommendations: how many units of the current edition must the publisher print? what is the optimal value of expected (average) profit?