This posting contains two example problems on Revenue management using Littlewood's rule.
Question 1: A trucking firm has current daily capacity of 200,000 cubic feet. A large manufacturer is willing to purchase the entire capacity at $0.10 per cubic foot per day. The manager of this trucking firm has observed that on the spot market, trucking capacity sells for an average $0.13 per cubic foot. Demand, however, is not guaranteed at this price. The manager forecasts daily demand on the spot market to be normally distributed with mean 60,000 cubic feet and a standard deviation of 20,000. How much trucking capacity should the manager save for the spot market?
Question 2: A manager at a larger manufacturer is planning warehouse e needs for the coming year. She predicts that warehousing needs will be normally distributed with a mean of 500,000 square feet and a standard deviation of 150,000 sq feet. The manager can obtain a full year lease at $0.50 per square feet per month or purchase storage space on the spot market. Spot market rates have averaged $0.70 per square foot per month. How large an annual contract should the manager sign?