Mr. Dan Stockman is the procurement manager for Slicker Image (SI), an upscale retailer of novelty products. It is mid-August, and Mr. Stockman is wondering how many units of a new multi-function smart bracelet to order for the upcoming holiday season (November and December). The Malaysian manufacturer of this item, TechToys, requires orders to be placed in late August for delivery in late October, in time for holiday sales. Based on past experience with similar products, Mr. Stockman believes that the holiday demand (Nov-Dec) for the bracelet is Normally distributed with a mean of 3,000 units and standard deviation of 900. TechToys sells the item to SI at a unit price of $ 145 per unit, and SI has decided to set the retail price at $ 200 during the regular selling season (Nov-Dec). At the end of December, SI will mark down the price by 50% (i.e., sell the item for $ 100) to sell off any left-over items. TechToys incurs a cost of $ 105 per unit to manufacture this bracelet. For simplicity, ignore all supplier to SI (and vice versa) shipping costs.

TechToys owner, Ms. Dhia Tunku, has heard of buy-back programs that book publishers offer to bookstores for new seasonal books. She is considering adopting a similar pricing strategy for TechToys relationship with SI. Specifically, she is thinking of offering to buy-back unsold bracelets from SI at the end of December, at a price of $ 120 per unit. Under this arrangement, TechToys will pay back (to SI) $120 for each unit that SI returns in December, and will then sell off these units at the same discounted price of $ 100 per unit that SI currently realizes for its unsold units.

i. If TechToys were to offer this buy-back program, how many units should SI order at the start of the season so as to maximize its expected profit?

ii. Does SIs profit increase or decrease compared to its (maximum) expected profit under the current procurement terms without buy-back (from part (b))?

iii. Whats in it for TechToys? Why offer a higher buy-back price than the price for which TechToys sells the returned units? Calculate TechToys expected profit under this buy-back program. Should TechToys offer SI the buy-back option or stick with its current terms?

iv. Briefly explain in intuitive/managerial terms why (how) the two firms profits change if TechToys introduces the buy-back option.