Alana Books Inc. is a book retailer that sells NY Times Bestsellers for four weeks and constantly
Question:
Alana Books Inc. is a book retailer that sells NY Times Bestsellers for four weeks and constantly moves on to new books - so, they typically place only one order of a new book. They are deciding how much to order of a new nonfiction book "AI for Business". The publisher will sell it to them at a cost of $20 and they will retail it at a price of $60. They expect that demand for the item is normally distributed with a mean of 500 and standard deviation of 200. Any item left over at the end of the four-week period is sold at a deep discount price that is only 20% of the regular retail price.
Show your work.
What is the understocking cost per unit? What is the overstocking cost per unit? How many units of the book should Trojan Books order so as to maximize expected profits?
If they order the quantity you estimated in part (a), what is the expected revenue from items sold at the deep discount price?
If they order the quantity you estimated in part (a), what is the expected revenue forgone because they had stockouts?
In the past, Alana Books had to turn away customers sometimes because demand was very high. The publisher has developed an on-demand printing option for rush orders that can be delivered to Trojan Books in one day but the cost of each book for a rush order is much more expensive and will be $50 per book (this cost is only for the additional units ordered, i.e., the rush order). Customers are willing to wait for a day for the book but the retail price is still $60.
Explain briefly why Trojan Books should consider placing rush orders. What is the initial order quantity (at the $20 cost) to the publisher in this scenario? Please copy and paste the spreadsheet or write down your analysis?
What is the expected revenue forgone due to stockouts in this scenario?