HULT INTERNATIONAL BUSINESS SCHOOL

San Francisco Campus

QUANTITATIVE METHODS AND MANAGERIAL DECISION MAKING

2010 Toolbox

Case 4 – The River City Bakery

For In Class Discussion. Please write up the case – provide your answers to the questions below
and describe your methods

River City is near the East Coast of the United States and has 25,000 inhabitants. A river runs
through the city and 15,000 people live on the north side of the river and 10,000 live on the south
side of the river.

The River City Bakery has very little competition. It bakes bread every morning and sells the
bread during the day. It is open seven days a week, including holidays.

The demand for bread appears to depend on the price that the bakery charges. Experience has
shown that if the price is $2.50 per loaf, the sales are around 8,000 loaves that day. If the price is
$2.00 per loaf, the sales are around 11,000 that day.

Costs of production include fixed costs of $500 per day and variable costs of $0.50 per loaf of
bread produced.

There is only one bridge connecting the two parts of the city.

Now the bridge is closed for emergency repairs. Infrastructure in the United States has become a
priority because so many bridges are almost falling down and a major one in Minneapolis did fall
down.

The River City Bakery is on the north side of the river. The people who live on the south side of
the river are richer than the ones who live on the north side, but the people on the south side can
no longer reach the River City Bakery. The river is wide and deep and there is no other bridge
within 25 kilometers.

Assume that health regulations prevent the bakery from selling day-old bread. All unsold bread
has to be thrown away.

Questions

a. Suppose that you are advising the River City Bakery. How many loaves of bread should
the bakery bake each morning?
b. In the first few days after the bridge is closed, sales of loaves are erratic. The first day
the bakery produces 6,000 loaves and sells them all by 11:30 in the morning at the price of $2.00
per loaf. The second day the bakery produces 7,000 loaves and sells 6,700 of them at the price
of $2.00 per loaf. The third day the bakery produces 6,500 loaves, raises the price to $2.50, and
sells 6,300 loaves at that price. How many loaves do you think the bakery should produce on the
fourth day and what price do you think the bakery should charge?
c. Now suppose that the demand has a random component. You think that the demand is
Normally distributed with mean of 6,500 and standard deviation of 200 if the price is $2.50 per
loaf and Normally distributed with mean of 7,000 and standard deviation of 300 if the price is
$2.00 per loaf. Develop a simulation to determine the optimal amount of loaves to produce for
each of those two prices. (Hint: the optimal number of loaves will not be the means of the
Normal distributions.)

Profit = revenue – cost

Cost = 500+0.5*number of loaf

X= demand of bread that day

C question:
Demand is normally distributed.
Sample size: at least 1000 (days)
If price= 2.5, Mean 6500, SD=200
NormInv (probability, mean, SD) = NormInv (rand(), 6500, 200) – randomly generate demand

If price=2.5, mean 7000, SD=300