Specialty Toys Essay

Case Problem: Specialty Toys
Solution:
1. From the Case, Management team recommends ordering quantities of 15,000; 18,000; 24,000 and 28,000.
Expected sales price = $24 per unit
Product cost = $16 per unit
And surplus products will be sold for $5 per unit
Sales forecaster predicts demand = 20,000 units with a 0.95 probability that demand would be between 10,000 and 30,000 units.

Let T be the demand for specialty’s toy. Based on normal distribution above with mean µ = 20,000 and standard deviation σ = ?

Then P(10,000 < T < 30,000) = 0.95

Calculating the area around the 95% probability (0.95) :
1 - 0.95 = 0.05 >>>>> 0.05/2 = 0.025. this applies to left and right sides of the area.

And from the Z-table, -0.025 = -1.96 hence 0.025 = 1.96.

Therefore, Z = 1.96

At T …show more content…
Profit potential for order quantity with a 70% chance of meeting demand and only a 30% chance of any stock-outs. What quantity would be ordered under this policy?

4a.
The order quantity to meet 70% demand is found by solving:
P (X < K) =0.70
P (Z < (K-20,000)/5102) = 0.70
(K-20,000)/5102 = 0.52
K = 20,000 + (5102 * 0.52) = 20,000 + 2653 =