The demand for a new product at Company B is anticipated to be normally distributed with a
Question:
The demand for a new product at Company B is anticipated to be normally distributed with a mean of 100 and a standard deviation of 50. Each unit costs £75 and the introductory price is to be £125. Any unsold units at the end of the season are unlikely to be very valuable and will be disposed of in a sale for £25 each. It costs £10 to hold a unit in inventory for the entire season
a) How many units should be ordered to maximise expected profits? Please show your full working.
b) Based on additional market research that Company B performs, they determine that they can increase the price to £150. At the same time, they have made an arrangement with an outlet store that will purchase unsold units for £60 each. Without any calculations, comment on the effect of these changes on the optimal customer service level and the optimal order quantity.
c) What impact would postponement and improved forecasting have on the inventory level for the new product at this company? Why?
d) After two months, the real demand for this new product has been recorded in the following table. Based on this information and the customer service level you calculated in a), what should the optimal order size be? Please show your full working.
- Demand (units) Probability
- 300 0.058
- 320 0.077
- 340 0.115
- 360 0.173
- 380 0.173
- 400 0.154
- 420 0.115
- 440 0.096
- 460 0.038
Expert Answer:
a Optimal Order Quantity to Maximize Expected Profits To find the optimal order quantity we can use the Newsvendor Critical Ratio model The goal is to find the order quantity that maximizes expected p... View the full answer
Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle
