1.A new edition of a very popular textbook will be published a year from now. The publisher currently has 1000 copies on hand and is deciding whether to do another printing before the new edition comes out. The publisher estimates that demand for the book during the next year is governed by the probability distribution in the following table. A production run incurs a fixed cost of $15,000 plus a variable cost of $20 per book printed. Books are sold for $190 per book. Any demand that cannot be met incurs a penalty cost of $30 per book, due to loss of goodwill. Up to 1000 of any leftover books can be sold to Barnes and Noble for $45 per book. The publisher is interested in maximizing expected profit. The following print-run sizes are under consideration: 0 (no production run) to 16,000 in increments of 2000. Explain thoroughly what decision would you recommend? Use simulation with 500 replications.
2.A Flexible Savings Account (FSA) plan allows you to put money into an account at the beginning of the calendar year that can be used for medical expenses. This amount is not subject to federal tax. As you pay medical expenses during the year, you are reimbursed by the administrator of the FSA until the money is exhausted. From that point on, you must pay your medical expenses out of your own pocket. On the other hand, if you put more money into your FSA than the medical expenses you incur, this extra money is lost to you. Your annual salary is $80,000 and your federal income tax rate is 30%.
- Assume that your medical expenses in a year are normally distributed with mean $2000 and standard deviation $500. Build a simulation model with 500 replications in which the output is the amount of money left to you after paying taxes, putting money in an FSA, and paying any extra medical expenses.