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Vicki’s Shop is a famous bakery in Chicago. Its reputation for quality and service is well-known
among locals and people in the nearby areas. “We pride ourselves on quality” said Vicki, the
owner, who makes sure that all products are made in the morning just before the store opens
every day so they will be fresh when customers arrive. To live up to its freshness reputation, any
unsold boxes will be discarded at the end of the day. “Also, we always have products available to
ensure every customer leaves the store happy”, she added.
A box of Vicki’s most popular doughnuts sells for $20. The cost of making one box is $6 and
demand is estimated to be
5.5. Suppose Vicki’s Shop uses an inventory model to determine its optimal stocking level for
this product, and you observe that it always makes 28 boxes of doughnut every morning.
Part A: What can be said about the goodwill cost? Provide a complete analysis to support your
answer.
Part B: What is the expected profit for this product?
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