Question

YB Sporting prints up novelty T-shirt commemorating major sport events. The T-shirt cost $5 to make and distribute and sell for $20. Company policy is to dispose of any excess inventory after the event by discounting the T-shirts by 80 percent, that is, sell for $4. For an upcoming event, the demand is estimated to be 12,000 shirts, with a significant amount of uncertainty. Due to this uncertainty, YB printed only 10,000 shirts. What do you think of this decision? What quantity would you have recommended printing?

Answer 1

Total demand for T-shirt is 12000 and the T shirts printed by YB sporting is 10000 and total profit on each shirt is 20-5= $15. If shirts are not sold then total loss is 5-1 =$1

1) If we consider the optimistic condition, 12000 customers turned out at the event then total opportunity cost for YB sporting is 15 * 2000 = $30000.

2) If we consider the pessimist situation, YB printed 12000 T-shirts and only 10000 customers turned out at the event then total loss is 2000 * 1 = $2000

If we compare both the arguments 1 and 2, total opportunity cost is much higher than the total loss. So underestimating the demand will give more loss to YB Sporting than going against the demand.

Hence according to me YB sporting should be optimistic about their demad forecasting ans they should go for 12000 T-shirts to print for the event in which they stand a good chance to get high profit.