Question

Sportswear company O'yeah designs and sells wetsuits to the U.S. market. The designs of the wetsuits...

Sportswear company O'yeah designs and sells wetsuits to the U.S. market. The designs of the wetsuits are updated each year. The process for updating the design typically starts in January the year before the designs are to be released. At this time, the purchasing, design, and sales departments have a two-day meeting to discuss the product portfolio for the upcoming year, including design, functionality, and price. In March, the designs are finalized, and the purchasing department starts negotiating with suppliers across the world. Production usually starts in September or October the year before the designs are to be released, and lasts until December or January depending on the supplier. In February, retailers start placing their orders to O'yeah, with retail sales of the new designs typically starting in early April. The season stretches from April to September. As the season progresses, retailers place replenishment orders to O'yeah, who supplies the retailers from a central warehouse. Sales peak in early summer. Towards the end of the summer, sales decline dramatically. When the season ends in September, O'yeah pushes out any remaining inventory to the retailers by offering all models at only 25% of the original selling price. 1)Consider a specific SKU# 001237 (Model A200, size L). For the upcoming year, O'yeah has negotiated with a supplier to have SKU# 001237 produced and delivered to O'yeah at $175 per unit. SKU# 001237 is sold to retailers at $225, for a unit margin of $50. Suppose total demand for SKU# 001237 for the upcoming season (the time during which the product is sold at full price) is estimated to follow a Normal distribution with mean 2,500 and standard deviation 400. How many A200, size L, should O'yeah produce to maximize expected profit? Please round to closest integer. 2)Last year, SKU# 001237 turned out to be extremely popular and sold out quickly. Since O'yeah makes a good margin on the product, management has decided they do not want the same situation again. "We cannot have the probability for out-of-stock during the season to be more than 5% on this model", said the sales manager recently. How many SKU# 001237 should O'yeah produce to ensure that the stock-out probability is exactly 5% during the season? Assume the same demand distribution as in Part 1. Please round to closest integer. 3)Consider the policy from Part 2. With your suggested production quantity, how many units of SKU# 001237 can O'yeah expect to be short during the regular season? Please answer with two decimals. 4)Consider the policy from Part 2. What is the expected contribution to profit from SKU# 001237? Please round to closest integer dollars. Answer without the dollar symbol. 5)The policy suggested by the sales manager leads to a lower expected profit than the "optimal" policy calculated in Part 1. The sales manager motivates this by claiming that the policy in Part 1 is not taking into account future lost profits by being out of stock. "So", he argues, "the expected profit implied by the 'optimal policy' is biased upwards." Suppose there is an additional cost per unit out-of-stock, ? . Suppose further that the policy suggested in Part 2 is the policy that maximizes expected contribution when this additional cost is taken into account. What is the additional cost ? ? Please round to closest integer dollars. Answer without the dollar symbol Solution for Part 5

Homework Answers

Answer #1

(1)

Cu = Cost of understocking = Selling price - Purchase cost = $225 - $175 = $50
Co = Cost of overstocking = Purchase cost - Salvage value = $175 - $225*25% = $118.75

Critical ratio = Cu / (Cu + Co) = 50 / (50+118.75) = 0.296

Z = NORMSINV(0.296) = -0.535

Production quantity (optimal) = 2500 + Z*400 = 2,286 units

(2)

Stock-out probability = 5%; so, in-stock probability = 95%

Z = NORMSINV(0.95) = 1.645

Production quantity = 2500 + Z*400 = 3,158 units

(3)

Normal loss function corresponding to Z=1.645 is L(Z) = 0.021

Expected lost sales = 0.021 x SD = 0.021 x 400 = 8 units

(4)

Q 2286
Z -0.54
Loss function, L(Z) (use tables) 0.723
Expected lost sales, L(Q) = L(Z) x s 289.2
Expected Sales, S(Q) = D - L(Q) 2210.8
Expcted left over, V(Q) = Q - S(Q) 75.2
Expected profit = Cu*S(Q) - Co*V(Q) $101,616
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
specialty toys inc. sells a variety of new and innovative cildren’s toys. Management learned that thr...
specialty toys inc. sells a variety of new and innovative cildren’s toys. Management learned that thr preholiday season is the best time to introduce a new toy, because many families use this time to look for new ideas for December holiday gift. When Specialty discovers a new toy wit good market potential , it chooses an October market entry date. In order to get toys in its store by October, Specialty places one-time ordes with its manufactures in June or...
Specialty Toys Specialty Toys, Inc., sells a variety of new and innovative children's toys. Management that...
Specialty Toys Specialty Toys, Inc., sells a variety of new and innovative children's toys. Management that learned the preholiday season is the best time to introduce a new toy, because many families use this time to look for new ideas for December holiday gifts. When Specialty discovers a new toy with good market potential, it chooses an October market entry date. In order to get toys in its stores by October, Specialty places one-time orders with its manufacturers in June...
Colerain Corporation is a merchandising company that is preparing a profit plan for the third quarter...
Colerain Corporation is a merchandising company that is preparing a profit plan for the third quarter of the calendar year. The company’s balance sheet as of June 30 is shown below: Colerain Corporation Balance Sheet June 30 Assets Cash $ 85,000 Accounts receivable 126,000 Inventory 56,350 Plant and equipment, net of depreciation 200,000 Total assets $ 467,350 Liabilities and Stockholders’ Equity Accounts payable $ 61,100 Common stock 360,000 Retained earnings 46,250 Total liabilities and stockholders’ equity $ 467,350 Colerain’s managers...
Specialty Toys, Inc., sells a variety of new and innovative children’s toys. Management learned that the...
Specialty Toys, Inc., sells a variety of new and innovative children’s toys. Management learned that the pre holiday season is the best time to introduce a new toy, because many families use this time to look for new ideas for December holiday gifts. When Specialty discovers a new toy with good market potential, it chooses an October market entry date. In order to get toys in its stores by October, Specialty places one-time orders with its manufacturers in June or...
Note: The company desires a minimum ending cash balance each month on $35,000. The beard grooming...
Note: The company desires a minimum ending cash balance each month on $35,000. The beard grooming products are sold to retailers for $20 each and the sales have been stagnant due to the Covid-19. However, the marketing department has been positive toward the end of the year due to season change and upcoming holiday. The marketing department has just sent you their forecasted quarter sales and marketing budget. Quarter 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022...
Sales Budget Honolulu Shirt Shop has very seasonal sales. Assume that for next year management is...
Sales Budget Honolulu Shirt Shop has very seasonal sales. Assume that for next year management is trying to decide whether to establish a sales budget based on average sales or on sales estimated by quarter. The unit sales for next year are expected to be 5% higher than current year sales. Unit shirt sales by quarter for this year were as follows: Children's Women's Men's Total Winter quarter 80 80 140 300 Spring quarter 180 120 160 460 Summer quarter...
Case Study: Monica’s Handbags Monica, after completing an internship with a national apparel company, decided that...
Case Study: Monica’s Handbags Monica, after completing an internship with a national apparel company, decided that she wanted to exercise her creative design talents and her strong entrepreneurial spirit by starting her own fashion business. She conducted fundamental market research and determined that there is an unfulfilled market need for the moderate fashion handbags that she had designed at the $100 retail price point. She also learned that the independent women’s apparel stores she was targeting require a 50% retail...
Pastina Company sells various types of pasta to grocery chains as private label brands. The company's...
Pastina Company sells various types of pasta to grocery chains as private label brands. The company's reporting year-end is December 31. The unadjusted trial balance as of December 31, 2021, appears below.     Account Title Debits Credits Cash 32,000 Accounts receivable 40,600 Supplies 1,800 Inventory 60,600 Notes receivable 20,600 Interest receivable 0 Prepaid rent 1,200 Prepaid insurance 6,600 Office equipment 82,400 Accumulated depreciation 30,900 Accounts payable 31,600 Salaries payable 0 Notes payable 50,600 Interest payable 0 Deferred sales revenue 2,300...
The comparative financial statements of the Summer Company are as follows. The market price of the...
The comparative financial statements of the Summer Company are as follows. The market price of the Summer Company common stock was $36 on December 31, 2016 and $11.20 on December 31, 2017.           Summer Company Comparative Balance Sheet December 31, 2017, 2016 and 2015 ASSETS 2017 2016 2015 Current Assets Cash $176,200 $253,100 $26,500 Accounts Receivable 238,850 31,850 67,350 Merchandise Inventory 62,500 42,500 130,000 Prepaid Expenses 700 1,700 2,200 Total Current Assets $478,250 $329,150 $226,050 Plant Assets 696,100 726,100 786,100...
Section 5: Subsidiary 5 – General Machinery Company Limited (Case for Audit Partner) General Machinery Company...
Section 5: Subsidiary 5 – General Machinery Company Limited (Case for Audit Partner) General Machinery Company Limited, a subsidiary company of Las Vegas Group Corporation (USA) Limited, is primarily a distributor of a range of machinery and equipment and also engages in other business activities. It has assets of approximately $4m, including current assets of nearly $2m. The draft Statement of Financial Performance of the company has just been completed by the company accountant and presented to the auditors, Disneyland...