EasyRent just started its DVD rental business It charges 3 f

EasyRent just started its DVD rental business. It charges $3 for overnight rental of new movies and guarantees that every new DVD they have is never out of stock. If a customer is not able to rent a DVD, EasyRent offers three free rentals as compensation. The estimated cost of this compensation is $8. Not every customer asks for the free rentals for compensation. EasyRent estimates that 80% of customers will ask for the free rental offer if the movie is not on the shelf. Recently, a new action movie is just about to be launched on DVD. According to historical data about action movies, the daily demand during the first month of release is a normal distribution with mean 130 and standard deviation 15. EasyRent has to pay $60 per copy of DVD for right to rent out the movie during its first month of release. Considering the stock levels of 120, 130, 140, 150, 160, and 170 use simulation approach to decide which stock level EasyRent should have in order to maximize its profit during the first month (30 days.)

a) Create an @RISK model for the first month of rentals to simulate net monthly income for the DVD for each stock level.

b) How many copies of the DVD should they stock?

Solution

a)

income

120 - ------360

130-------370

140------1860

150------862

160------1000

170-------65051

b)

they should 150 in stock