The wholesale price will be increased from $10 to $12.25; in return, the publisher will buy back all leftover inventory at a price of $12.68.However the retailer is responsible for shipping the books back to the publisher at a cost of $1 per copy. The publisher is able to sell all the returned books on their website at a discounted price of $5.

a.Under this plan, how many copies should Boundaries order?

b.How much is the expected profit for Boundaries?

c.How much is the expected profit for the publisher?

d.How much is the total expected profit for both publisher and retailer? How does this total compare to Part e?

e.What should the publisher do, i.e. should they offer the buy-back contract? Why, or why not?

Newsvendor Formulas

Critical Ratio: CR = C _u / [ C _u + C _o ]

Excel formula for Z: = NORMSINV(CR)

Order Quantity: Q = + Z

Once Q and Z are known:

Expected Lost Sales (i.e. understock): ELS = X Loss(Z)

To find Loss(Z), you can use the Standard Normal Loss table, or

in Excel: Loss(Z): = NORMDIST(Z,0,1,0) - Z*(1-NORMSDIST(Z))

Expected Sales: ES = - ELS

Expected Leftover Inventory (i.e. overstock): ELI = Q - ES

Expected Profit for the Retailer: EP_Ret = C_u X ES - C_o X ELI

Expected Profit for the Manufacturer: EP_Mfg = (w - c) X Q [without any contract]

EP_Mfg = (w - c) X Q - b X ELI + s X ELI [with a buy-back contract]

Answer rating: 100% (QA)

To solve this problem we will use the newsvendor model and the given formulas Given information Wholesale price before increase 10 Wholesale price aft... View the full answer