Suppose a firm is selling two different toys for the holiday season (single selling period.) Both toys sell for $20 and cost $4. Demand for both products is estimated to be Normally distributed with means and standard deviations as shown above.  There is no salvage value or goodwill penalty.

	Product 1	Product 2
Selling price	$20	$20
Unit cost	$4	$4
Salvage value	$0	$0
Goodwill cost	$0	$0
Mean demand	100	150
Standard deviation of demand	30	40

Suppose that the toys are differentiated only by their packaging.  The firm can purchase unboxed toys for $3.25 and package them as needed at the time of the customer order for an additional $1.  Will using this option of buying unboxed toys and packaging them on demand increase expected profit?  Assume that the demands for the two products are independent which means the standard deviation of the total demand is the square root of the sum of the standard deviations squared.  Also assume that this packaging on demand process will work and will not disrupt internal operations or negatively affect the customer experience.

Answer rating: 100% (QA)

To determine whether using the option of buying unboxed toys and packaging them on demand will incre... View the full answer