An order for 10 custom-designed castings has been received. The casting process costs $1100 per unit...
An order for 10 custom-designed castings has been received. The casting process costs $1100 per unit scheduled. If a casting is not sold it has a recycle value of $300. The customer has indicated a willingness of to pay $2700 per casting for acceptable casting no more no less! • If number of good casts is less than 10 then the customer does not accept • For only one casting if we have the 5% chance probability of having defective • How many casting should be scheduled for production in order to maximize profit?
Homework Answers
All the 10 castings should be scheduled for production because we have 95% chance that the all the castings would be good and saleable to the client.
Option 1 : All the 10 castings are sold.
Selling price of one casting : $2700 per casting
Cost of processing one casting ; $1200 per casting
Profit per casting : 2700 - 1200 = 1500 per casting
Total revenue from 10 castings : $1500 per casting * 10 castings = $15000.
Option 2 : 9 castings are sold 1 is not accepted by the client.
Profit per casting same as above : $1500 per casting
Scrap value of not accepted casting $300.
Total revenue from 10 castings : $1500 *9 +$300 = $13800
Therefore option 2 is correct.
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