Felgas, a manufacturer of felt gaskets has production capacity of 1,000 units per day. Currently, the firm sells production capacity at $5 per unit. At this price, all production capacity gets booked about one week in advance. Some customers have said that they would be willing to pay twice as much if Felgas had the capacity to be available on the last day. About 10 days in advance, demand for the high-segment is normally distributes with a mean of 250 and a standard deviation of 100. How much production capacity should Felgas reserve for the last day?

Felgas should reserve for the last day 250 units

Explanation:

According to the given data we have the following:

price charged to lower price segment=pl=5

price charged to higher price segment=pay twice of pl, therefore price charged to higher price segment=ph=10

Mean Demand=DH=250

σH=100

In order to calculate how much production capacity should Felgas reserve for the last day we have to use the following formula:

CH=NORMINV(1-pl/ph,DH,σH)

=NORMINV(1-5/10,250,100)

=NORMINV(1-0.5,250,100)

=250 units

Felgas should reserve for the last day 250 units

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