Benetton has entered into a quantity flexibility contract with a retailer for a seasonal product. If the retailer orders O units, Benetton is willing to provide up to another $35$ percent if needed. Benetton$$s production cost is $$20,$ and it charges the retailer a wholesale price of $$36.$ The retailer prices to customers at $$55$ per unit. Any unsold units can be sold by the retailer at a salvage value of $$25.$ Benetton can salvage only $$10$ per unit for its leftover inventory. The retailer forecasts demand to be normally distributed, with a mean of $4,000$ and a standard deviation of $1,600.$

How does this information help us make good decisions?

Put another way, come up with a model that shows where it stops making sense for Benetton to produce products. In other words what is the equilibrium between supplying and losing money? If they get too many returns then they lose money. We should also consider where our costs outweigh benefit. Think of the law of diminishing returns.

Here is what you know:

You have some idea of what to expect based on the forecasts and the standard deviation. Remember what we talked about with standard deviations. Assume the demand is normally distributed so you can expect what percentage is away from the mean for each standard deviation.