Problem 3

A baker is trying to figure out how many dozens of bagels to bake each day. The probability distribution of the number of customers entering the shop each day is as follows: 

60% of the people entering the shop purchase bagels. Customers order 1, 2, 3 or 4 dozens of bagels according to the following distribution:

Bagels sell for $8.00 per dozen. They cost $4.00 per dozen to make. All bagels not sold at the end of the day are sold at half-price at a local grocery store.

Tasks:

1) Use MS Excel to develop a Monte Carlo simulation model to determine the optimal number of bagels (in dozens) to bake each morning. State your assumptions.

2) Comment on the optimal number of simulations required for your model to reach a steady state.

3) Estimate the daily profit.