Example 2

Suppose that you are the sales manager of Migros supermarket chain in Istanbul. You are going to make a
decision about the optimal number of bottles of Efes beer that should be stocked for each month. The cost of
each bottle to Migros is $60 and then, it is sold at a price of $95 per unit. Migros receives $20 for each bottle
that is unsold by the end of the week and returned back to Efes. The sales data for the last 50 weeks is given as
follows:
Quantities Buyers Bought
20
21
22
23

Number of Months this occured

20
15
10
5

a. Using the Expected Value Criterion, obtain the optimum number of Efes bottles the sales manager of
Migros should stock per month.
b. Using the maximum Likelihood Criterion, obtain the optimum number of Efes bottles the sales manager
of Migros should stock per month.
a) Using The Expected Value Criterion
Bottles of Beer Demanded
20
21
22
23
Total

Number of weeks
20
15
10
5
50

Probability
20/50 = 0.40
15/50 = 0.30
10/50 = 0.20
5/50 = 0.10
1.00

Conditional Profit Table:

Profit = TR TC
TR = P * Qsold
TC = C * Qstocked
P = $95 and C = $60
Profit Received from the Unsold Bottles = $20
a. Weekly Profit when Stock = 20 bottles/week and Demand = 20
Profit = TR TC = (20*95) (20*60) = 700
b. Weekly Profit when Stock = 21 bottles/week and Demand = 20
Profit = (TR TC) + (# of unsold bottles*Profit Received)
= [(20*95) (21*60)] + (1*20) = 660
c. Weekly Profit when Stock = 22 bottles/week and Demand = 20
Profit = (TR TC) + (# of unsold bottles*Profit Received)
= [(20*95) (22*60)] + (2*20) = 620
d. Weekly Profits when Stock = 23 bottles/week and Demand = 20
Profit = (TR TC) + (# of unsold bottles*Profit Received)
= [(20*95) (23*60)] + (3*20) = 580

States of Nature

Probabilitie
s
0.40
0.30
0.20
0.10

Demand
20
21
22
23

Feasible Stock Action

20
21
700
700
700
700

660
735
735
735

22

23

620
695
770
770

580
655
730
805

E()20 = (0.40*700) + (0.30*700) + (0.20*700) + (0.10*700) = $700

E()21 = (0.40*660) + (0.30*735) + (0.20*735) + (0.10*735) = $705
E()22 = (0.40*620) + (0.30* 695) + (0.20*770) + (0.10*770) = $687.50
E()23 = (0.40*580) + (0.30*655) + (0.20*730) + (0.10*805) = $655
Therefore: The optimum choice is to stock 21 bottles because it yields max. expected profit of $705.
b) Using The Maximum Likelihood Criterion
We take the highest probability of 0.40 from the conditional probability table

States of Nature

Probabilitie
s
0.40
0.30
0.20
0.10

Demand

Feasible Stock Action

20
21

20
21
22
23

700
700
700
700

660
735
735
735

22

23

620
695
770
770

580
655
730
805

Therefore: The optimum choice is to stock 20 bottles because it yields max. expected profit of $700.
Exercise 4. Suppose that you are the sales manager of MIGROS supermarket chain in
Istanbul. You are trying to make a decision about the optimal number of bottles of
EFES beer that should be stocked for each month. The cost of each bottle to
MIGROS is 10 $, whereas the price that MIGROS charges from the customers is
15$ per bottle. Furthermore, MIGROS receives $5 only for each bottle that is unsold by the end of the week and
returned back to the producer of EFES. The sales data for the last 200 months is given below:
QUANTITES BUYERS
BOUGHT
5000
3500.
3000
2500

NUMBER OF MONTHS
THIS OCCURRED
30
70
60
40

A. Using the EXPECTED VALUE criterion obtain the optimal number of EFES bottles that the sales manager
of MIGROS should stock per month. (15 pts)
B. Using the MAXIMUM LIKELIHOOD criterion obtain the optimal number of EFES bottles that the sales
manager of MIGROS should stock per month. (5 pts)