Date: 31-May-2025
Name: Abhijit Dey
Roll number: 23b4epgp114
Subject: SSRM Mid term
Date: 31-May-2025
Q1)
Given:
Purchase cost (C) = Rs. 8 per unit
Selling price (P) = Rs. 20 per unit
Salvage value (S) = Rs. 4 per unit
Demand distribution:
Daily Demand 30 40 50 60 70
Frequency 3 6 12 3 6
Total days = 3 + 6 + 12 + 3 + 6 = 30 days
Probability Distribution:
Demand (D) Probability (P(D))
30 3/30 = 0.1
40 6/30 = 0.2
50 12/30 = 0.4
60 3/30 = 0.1
70 6/30 = 0.2
a) Optimal Stock Quantity:
The optimal stock quantity is determined using the Critical Ratio (CR):
CR = Cu/(Cu + Co)
Where:
Cu = P - C = 20 - 8 = Rs. 12 (Underage cost)
Cu = C - S = 8 - 4 = Rs. 4 (Overage cost)
CR = 12/(12 + 4) = 12/16 = 0.75
Find the smallest stock quantity Q such that the cumulative probability P(D <= Q) >= 0.75
P(D <= 30) = 0.1
P(D <= 40) = 0.1 + 0.2 = 0.3
P(D <= 50) = 0.3 + 0.4 = 0.7
P(D <= 60) = 0.7 + 0.1 = 0.8
Since 0.8 >= 0.75, the optimal stock quantity is 60 newspapers.
b) Expected Profit Comparison:
Calculate expected profit for Q = 50, Q = 60, and Q = 70:
For = 60:
Profit = (P - C) * Min(D, Q) + (S - C) * Max(Q - D, 0)
E(Profit) = Σ(12 * Min (D, 60) - 4 * Max(60 - D, 0) * P(D)
= (12 * 30 - 4 * 30) * 0.1 + (12 * 40 - 4 * 20) * 0.2 + (12 * 50 - 4 * 10) * 0.4 + (12 * 60) * 0.1 + (12
* 60) * 0.2
= (360 - 120) * 0.1 + (480 - 80) * 0.2 + (600 - 40) * 0.4 + (720) * 0.1 + (720) * 0.2
= 240 * 0.1 + 400 * 0.2 + 560 * 0.4 + 720 * 0.1 + 720 * 0.2
= 544
For = 50:
E(Profit) = (12 * 30 - 4 * 20) * 0.1 + (12 * 40 - 4 * 10) * 0.2 + (12 * 50) * 0.4 + (12 * 50) * 0.1 +
(12 * 50) * 0.2
= (360 - 80) * 0.1 + (480 - 40) * 0.2 + (600) * 0.4 + (600) * 0.1 + (600) * 0.2
= 280 * 0.1 + 440 * 0.2 + 600 * 0.4 + 600 * 0.1 + 600 * 0.2
= 536
For Q = 70:
E(Profit) = (12 * 30 - 4 * 40) * 0.1 + (12 * 40 - 4 * 30) * 0.2 + (12 * 50 - 4 * 20) * 0.4 + (12 * 60 - 4
* 10) * 0.1 + (12 * 70) * 0.2
= (360 - 160) * 0.1 + (480 - 120) * 0.2 + (600 - 80) * 0.4 + (720 - 40) * 0.1 + (840) * 0.2
= 200 * 0.1 + 360 * 0.2 + 520 * 0.4 + 680 * 0.1 + 840 * 0.2
= 536
Hence, Q = 60 yields the highest expected profit (Rs. 544) compared to Q = 50 (Rs. 536) and
Q = 70 (Rs. 536).
Q2)
Given:
Segment 1 (Early Bookers):
Demand: D1 = -0.35P1 + 2800
Cost per room (C) = Rs. 3800
Segment 2 (Late Bookers):
Demand: D2 = -0.28P2 + 3500
a) Segment 1 (Early Bookers) should pay less because they book in advance, reducing
uncertainty for the hotel. Lower prices incentivize early bookings, ensuring steady revenue
and better capacity planning.
b) Optimal Price and Profit for Both Segments:
Segment 1:
Revenue: R1 = P1 * D1 = P1 (-0.35P1 + 2800)
Profit: π1 = (P1 - 3800)(-0.35 P1 + 2800)
Maximize π1:
d π1 / dP1 = -0.7 P1 + 2800 + 0.35 * 3800 = 0
-0.7 P1 + 2800 + 1330 = 0 => -0.7 P1 = -4130 => P1 = 5900
Segment 2:
Revenue: R2 = P2 * D2 = P2 (-0.28P2 + 3500)
Profit: π2 = (P2 - 3800)(-0.28P2 + 3500)
Maximize π2:
d π2/ dP2 = -0.56P2 + 3500 + 0.28 * 3800 = 0
-0.56P2 + 3500 + 1064 = 0 => -0.56P2 = -4564 => P2 = 8150
Total Profit:
π1 = (5900 - 3800)(-0.35 * 5900 + 2800) = 2100 * 735 = 1543500
π2 = (8150 - 3800)(-0.28 * 8150 + 3500) = 4350 * 1218 = 5298300
Total Profit = 1543500 + 5298300 = 6841800
c)
Total demands:
Dtotal = D1 + D2 = -0.63P + 6300
Profit:
π = (P - 3800)(-0.63P + 6300)
Maximize π:
dπ / dP = -1.26P + 6300 + 0.63 * 3800 = 0
-1.26P + 6300 + 2394 = 0 => -1.26P = -8694 => P = 6900
π = (6900 - 3800)(-0.63 * 6900 + 6300) = 3100 * 1890 = 5859000
Hence, price discrimination yields higher profit (Rs. 6841800) than no discrimination (Rs.
5859000).
Q3)
Given:
Probability of success (P(S)) = 2/3, Failure (P(F)) = 1/3
Profit if successful = Rs. 1500000
Loss if unsuccessful = Rs. 1800000
Market survey cost = Rs. 300000
Survey accuracy:
- P(Survey Success | S) = 0.8
- P(Survey Failure | F) = 0.7
a) Decision Without Survey:
Alternatives:
1. Develop the product.
2. Do not develop the product.
States of Nature:
1. Product is successful.
2. Product is unsuccessful.
Expected Profit (Develop):
E(π) = (2 / 3 * 1500000) + (1 / 3) * (-1800000) = 1000000 - 600000 = 400000
Recommendation:
Develop the product (expected profit = Rs. 400000 > 0).
b) Posterior Probabilities (With Survey):
P(Survey Success) = P(S) * 0.8 + P(F) * 0.3 = (2 / 3) * 0.8 + (1 / 3) * 0.3 = 0.633
P(Survey Failure) = 1 - 0.633 = 0.367
P(S | Survey Success) = (0.8 * (2 / 3))/ 0.633 = 0.842
P(F | Survey Success) = 1 - 0.842 = 0.158
P(S | Survey Failure) = (0.2 * (2 / 3))/0.367 = 0.363
P(F | Survey Failure) = 1 - 0.363 = 0.637
c) Optimal Policy:
If Survey is Successful:
E(π) = 0.842 * 1500000 + 0.158 * (-1800000) = 1263000 - 284400 = 978600
If Survey is Failed:
E(π) = 0.363 * 1500000 + 0.637 * (-1800000) = 544500 - 1146600 = -602100
Expected Value with Survey:
E(πsurvey) = 0.633 * 978600 + 0.367 * 0 - 300000 = 619754 - 300000 = 319754
Compare with No Survey (Rs. 400000):
Do not conduct the survey, directly develop the product.
