FTX Inc, an electronics system integrator, is developing a new product as part of their annual generational upgrades. Owing to their long business history, they are considering Setronics as the supplier of hardware for this product. Setronics selling price is $106 per unit, including transportation costs. Due to long lead times and high setup costs, both firms agree on a single replenishment order before the upcoming annual season. Assume Setronics gross margin is 60% of its selling price for units produced in this pre-season order.

FTXs recent annual demand forecast is Normally distributed with mean 6655 and standard deviation 1500. FTX sells each unit, after integrating their proprietary software, for $194. Leftovers at the end of the season are liquidated for $30 per unit. FTX incurs holding costs at 1.4 per unit per month.

Make sure to use the following information in calculating Cu, Co, and holding costs when needed: FTX begins incurring holding costs upon delivery. Ignore holding costs at Setronics. Leftover items are held for the whole duration of the selling season. Sold items are held in the inventory for half the duration of the selling season (on average).

a) How many of these units should FTX order to maximize their annual expected profits? Calculate resulting expected profits for FTX and Setronics. Hint: Use the Newsvendor model.

Suppose a local supplier, ATEC Inc, approaches FTX with the possibility of supplying this unit. ATECs main value proposition is that they offer 100% in-stock probability with 5-day delivery on all FTXs orders, regardless of quantity and time of orders. Since FTX promises its customers a 2-week lead time, this highly reactive capacity at ATEC would enable FTX meet all their demand, as in make-to-order. ATECs unit price is $130 per unit.

b) Suppose FTX were to procure only from ATEC. What would be FTXs profit? c) Suppose FTX plans to use both suppliers: A single pre-season order from Setronics, and then supply from ATEC as needed. How many units should FTX order from these suppliers? Calculate resulting expected profits for FTX. Hint: Use revenues minus costs to calculate profit, and make sure to include holding costs.