Established in 1991, Dolores Ltd. has been successfully growing on the Estonian market as a cosmetics...

 

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Established in 1991, Dolores Ltd. has been successfully growing on the Estonian market as a cosmetics company importing brands from Israel and distributing beauty products to the local department stores, pharmacies, and beauty salons. Starting from a company of 2 in 1990 with $20,000 in revenue, Dolores Ltd ended 2015 with 6 employees and $330,000 in revenue. Having started with only one brand (Natural Sea Beauty), Dolores has expanded her product portfolio to 7 different brands. Dolores was very proud of her business and always tried to provide something special for her customers for the holiday season. Holiday Planning Problem Anna Lotan, the most successful brand in Estonia, offered Dolores to buy holiday gift sets created specifically for European and U.S. markets. The gift set consists of two creams (hydrating facial serum and a moisturizing night cream) in sparkly jars packaged together in a beautiful box that says Happy Holidays and has a decorative pine tree with a golden cone. It was atypical for suppliers from Israel to offer Christmas and New Year's gift sets and Dolores definitely wanted to take advantage of this opportunity. The packaging design made the set a very attractive gift. The sets cost $17; shipping, customs, and other expenses to bring the sets to Estonia add another $13 to the cost. The sets can be sold for $60 during the holiday season. Needless to say, once the holiday season is over, these sets significantly lose value. At that time, Dolores plans to put them on clearance for $20 and is certain that she will be able to sell them all at this price. Due to significant lead time (not only it takes about 4 weeks from the order placement time until delivery, Fall production and shipment schedule in Israel gets multiple disruptions due to local holidays) all planning and ordering of gift sets needs to be done in early October to ensure delivery by Christmas season. Once the order is placed, the sets will be delivered in one shipment, and there will be no time to order and receive a second shipment. Demand Data This is the first year that Dolores will offer gift sets for the holidays and hence, there is no historical information to predict the demand. Dolores puts together a cross-functional team to estimate the demand; luckily, the company kept track of their corporate and individual clients that have inquired about holiday gifts in the past and they use this information as a starting point. Trying to keep things simple, the team estimates that the demand can take any of the following four values': Demand 300 400 500 600 Probability 0.2 0.3 0.4 0.1 Assignment Questions: 1. Assume that Dolores orders 400 sets. a. What is the profit if demand is 300? b. What is the profit if demand is 400? c. What is the profit if demand is 500? d. What is the profit if demand is 600? e. What is the expected profit? 2. How many gift sets should Dolores order to maximize expected profit? 3. Assume that Dolores intended to order 400, but her secretary accidentally typed in 401 sets instead of 400. The demand ended up being 400, what did Dolores lose because of the secretary's mistake? 4. Assume that Dolores intended to order 400, but her secretary accidentally typed in 399 sets instead of 400. The demand ended up being 400, what did Dolores lose because of the secretary's mistake? 5. Assume that Dolores can invest in marketing research prior to ordering that will tell her EXACTLY what the demand is going to be. Up to how much money should she be willing to invest in such research? Established in 1991, Dolores Ltd. has been successfully growing on the Estonian market as a cosmetics company importing brands from Israel and distributing beauty products to the local department stores, pharmacies, and beauty salons. Starting from a company of 2 in 1990 with $20,000 in revenue, Dolores Ltd ended 2015 with 6 employees and $330,000 in revenue. Having started with only one brand (Natural Sea Beauty), Dolores has expanded her product portfolio to 7 different brands. Dolores was very proud of her business and always tried to provide something special for her customers for the holiday season. Holiday Planning Problem Anna Lotan, the most successful brand in Estonia, offered Dolores to buy holiday gift sets created specifically for European and U.S. markets. The gift set consists of two creams (hydrating facial serum and a moisturizing night cream) in sparkly jars packaged together in a beautiful box that says Happy Holidays and has a decorative pine tree with a golden cone. It was atypical for suppliers from Israel to offer Christmas and New Year's gift sets and Dolores definitely wanted to take advantage of this opportunity. The packaging design made the set a very attractive gift. The sets cost $17; shipping, customs, and other expenses to bring the sets to Estonia add another $13 to the cost. The sets can be sold for $60 during the holiday season. Needless to say, once the holiday season is over, these sets significantly lose value. At that time, Dolores plans to put them on clearance for $20 and is certain that she will be able to sell them all at this price. Due to significant lead time (not only it takes about 4 weeks from the order placement time until delivery, Fall production and shipment schedule in Israel gets multiple disruptions due to local holidays) all planning and ordering of gift sets needs to be done in early October to ensure delivery by Christmas season. Once the order is placed, the sets will be delivered in one shipment, and there will be no time to order and receive a second shipment. Demand Data This is the first year that Dolores will offer gift sets for the holidays and hence, there is no historical information to predict the demand. Dolores puts together a cross-functional team to estimate the demand; luckily, the company kept track of their corporate and individual clients that have inquired about holiday gifts in the past and they use this information as a starting point. Trying to keep things simple, the team estimates that the demand can take any of the following four values': Demand 300 400 500 600 Probability 0.2 0.3 0.4 0.1 Assignment Questions: 1. Assume that Dolores orders 400 sets. a. What is the profit if demand is 300? b. What is the profit if demand is 400? c. What is the profit if demand is 500? d. What is the profit if demand is 600? e. What is the expected profit? 2. How many gift sets should Dolores order to maximize expected profit? 3. Assume that Dolores intended to order 400, but her secretary accidentally typed in 401 sets instead of 400. The demand ended up being 400, what did Dolores lose because of the secretary's mistake? 4. Assume that Dolores intended to order 400, but her secretary accidentally typed in 399 sets instead of 400. The demand ended up being 400, what did Dolores lose because of the secretary's mistake? 5. Assume that Dolores can invest in marketing research prior to ordering that will tell her EXACTLY what the demand is going to be. Up to how much money should she be willing to invest in such research?

Answer rating: 100% (QA)

1 Profit Calculation for Different Demand Scenarios Order 400 sets a Profit if demand is 300 300 400 ... View the full answer