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Optimal Order Quantity for Specialty Toys

The document provides information from a forecaster about demand for a toy called Weather Teddy. The forecaster estimates demand will follow a normal distribution with a mean of 20,000 units and standard deviation of 5,102 units. Several order quantities are considered: 15,000, 18,000, 24,000, 28,000, and 22,653 units. Profit projections are provided for each order quantity under scenarios where demand is 10,000, 20,000, or 30,000 units. An optimal order quantity of 18,980 units is identified using a single-period inventory model that maximizes expected profit.

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9 views4 pages

Optimal Order Quantity for Specialty Toys

The document provides information from a forecaster about demand for a toy called Weather Teddy. The forecaster estimates demand will follow a normal distribution with a mean of 20,000 units and standard deviation of 5,102 units. Several order quantities are considered: 15,000, 18,000, 24,000, 28,000, and 22,653 units. Profit projections are provided for each order quantity under scenarios where demand is 10,000, 20,000, or 30,000 units. An optimal order quantity of 18,980 units is identified using a single-period inventory model that maximizes expected profit.

Uploaded by

Phạm Tùng
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

CaseProblem:SpecialtyToys

1.

Informationprovidedbytheforecaster

Atx=30,000,
z

x 30, 000 20, 000

1.96

30, 000 20,000


5102
1.96

20, 000
Normaldistribution
2.

5102

+15,000
z

15, 000 20, 000


0.98
5102

P(stockout)=0.3365+0.5000=0.8365
+18,000
z

18, 000 20, 000


0.39
5102

P(stockout)=0.1517+0.5000=0.6517
+24,000
z

24, 000 20, 000


0.78
5102

P(stockout)=0.50000.2823=0.2177

+28,000
z

28, 000 20, 000


1.57
5102

P(stockout)=0.50000.4418=0.0582

3.

Profitprojectionsfortheorderquantitiesunderthe3scenariosarecomputedbelow:
OrderQuantity:15,000
UnitSales
10,000
20,000
30,000

TotalCost
240,000
240,000
240,000

at$24
240,000
360,000
360,000

Sales

at$5
25,000
0
0

Profit
25,000
120,000
120,000

OrderQuantity:18,000
UnitSales
10,000
20,000
30,000

TotalCost
288,000
288,000
288,000

at$24
240,000
432,000
432,000

Sales

at$5
40,000
0
0

Profit
8,000
144,000
144,000

OrderQuantity:24,000
UnitSales
10,000
20,000
30,000

TotalCost
384,000
384,000
384,000

at$24
240,000
480,000
576,000

Sales

at$5
70,000
20,000
0

Profit
74,000
116,000
192,000

OrderQuantity:28,000
UnitSales
10,000
20,000
30,000

TotalCost
448,000
448,000
448,000

at$24
240,000
480,000
672,000

Sales

at$5
90,000
40,000
0

Profit
118,000
72,000
224,000

4.

Weneedtofindanorderquantitythatcutsoffanareaof.70inthelowertailofthenormalcurvefordemand.

Q 20, 000
0.52
5102

Q=20,000+0.52(5102)=22,653
Theprojectedprofitsunderthe3scenariosarecomputedbelow.
OrderQuantity:22,653
UnitSales
10,000
20,000
30,000
5.

TotalCost
362,488
362,488
362,488

at$24
240,000
480,000
543,672

Sales

at$5
63,265
13,265
0

Profit
59,183
130,817
181,224

[Link]
projectedprofitobtainedunderthe3scenariosusedinparts3and4.Anorderquantityinthe18,000to
20,000rangestrikesagoodcompromisebetweentheriskofalossandgeneratinggoodprofits.
Whilethestudentsdon'thavethebenefitofthefollowing,asingleperiodinventorymodel(sometimescalled
thenewsvendormodel)[Link].
Asingleperiodinventorymodelrecommendsanorderquantitythatmaximizesexpectedprofitbasedonthe
followingformula:

P(Demand Q* )

where

istheprobabilitythatdemandislessthanorequaltotherecommendedorder
Q* cu
co
quantity, . isthecostofunderestimatingdemand(havinglostsalesbecauseofastockout)and isthe
costperunitofoverestimatingdemand(havingunsoldinventory).SpecialtywillsellWeatherTeddyfor$24
cu
[Link]$[Link], =$24$16=$[Link],
co
Specialtywillsellallsurplusinventoryfor$[Link], =$16$5=$11.
8
P(Demand Q* )
0.4211
8 11

Q* 20, 000
0.20
5102

Q* 20, 000 0.20(5102) 18,980

Theprofitprojectionsforthisorderquantityarecomputedbelow:
OrderQuantity:18,980
Sales
UnitSales
10,000
20,000
30,000

TotalCost
303,680
303,680
303,680

at$24
240,000
455,520
455,520

at$5
44,900
0
0

Profit
18,780
151,840
151,840

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