Specialty Toys, Inc. Sells a variety of new and innovative children’s and believes that the preholiday season is the best time to introduce a new toy. Many families use this time to look for new ideas for December holiday gifts. When specialty has a new toy with good market potential, it chooses an October market entry date.
For the coming season, Specialty plans to introduce a new product called Weather Teddy. Specialty faces the decision of how many Weather Teddy units to order for the coming holiday season. Members of the management team recommended order quantities of 15,000, 18,000, 24,000 and 28,000. Considerable disagreement concerning the market potential is evidenced by the different order quantities suggested. The product management team has asked you for an analysis of the stock-out probabilities for various order quantities and estimate of the profit potential, and to help make an order quantity recommendation. Specialty expects to sell Weather Teddy for $24, and the cost is $16 per unit. If inventory remains after the holiday season, Specialty will sell all surplus inventory for $5 per unit. After reviewing the sales history of similar products, Specialty’s senior sales forecaster predicted and expected demand of 20,000 units with a 0.95 probability that demand would be between 10,000 and 30,000 units.
Prepare a managerial report that addresses the following issues and recommends an order quantity for the Weather Teddy.
1. Use the sales forecaster’s prediction to describe a normal probability distribution that can be used to approximate the demand distribution. Sketch the distribution and show its mean and standard deviation.
2. Compute the probability of a stock-out for the order quantities suggested by members of the management team.
3. Compute the projected profit for the order quantities suggested by the management team under three scenarios. Worst case: sales =10,000 units; most likely case: sales = 20,000 units; and best case: sales = 30,000 units.
4. One of Specialty’s managers felt that the profit potential was so great that the order quantity should have a 70% chance of meeting demand and only a 30% chance of any stock-outs. What quantity would be ordered under this policy and what is the projected profit under the three scenarios in part 3?
5. Provide your own recommendation for an order quantity and not the associated profit projections. Provide a rationale for your recommendation.