Consider a distributor of a seasonal item that maintains 2 regional warehouses. Demand at each warehouse is affected by local market conditions, which can either be excellent (E), good (G), or poor (P). Each scenario is equally likely. Under scenario E, demand during the selling season is 300; under scenario G, demand is 200; and under scenario P, demand is 100. The distributor purchases each unit at a cost of $100, resells it at $150 and disposes of unsold units at $50.
Required:
a. What is the optimal order quantity for the distributor at each warehouse? What is the total expected profit generated by the distributor?
b. The distributor is considering consolidating the two warehouses into a single one. If local market conditions at the warehouses are independent, what would be the additional profit realized by the distributor.
c. What would be the additional profit (generated from consolidation) if market conditions are always the same at both warehouses?
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