Novelty Toys, Inc. sells a variety of new and innovativechildrens toys. Management learned that the preholiday season isthe best time to introduce a new toy, because many families usethis time to look for new ideas for December holiday gifts. WhenNovelty discovers a new toy with good market potential, it chosesan October market entry date.
In order to get toys in its stores by October, Novelty placesone-time orders with its manufactures in July of each year. Demandfor children toys can be highly volatile. If a new toy catcheson, a sense of shortage in the marketplace often increases thedemand to high levels and large profits can be realized. However,new toys can also flop, leaving Novelty stuck with high levels ofinventory that must be sold at reduced prices. The most importantquestion the company faces is deciding how many units of a new toyshould be purchased to meet anticipated sales demand. If too feware purchased, sales will be lost; if too many are purchased,profits will be reduced because of low prices realized in clearancesales.
For the coming season, Novelty plans to introduce a new productcalled Weather Teddy. This variation of a talking teddy bear ismade by a company in Taiwan. When a child presses Teddys hand, thebear begins to talk. A built-in barometer selects one of fiveresponses that predict weather conditions. The responses range from. It looks to be a very nice day! Have fun I think it may raintoday. Dont forget your umbrella. Tests with the product showthat, even though it is not a perfect weather predictor, itspredictions are surprisingly good. Several of Noveltys managersclaimed Teddy gave predictions of the weather as good as localtelevision weather forecasters.
As with other products, Novelty faces the decision of how manyWeather Teddy units to order for the coming holiday season. Membersof the management team suggested order quantities of 15,000,18,000, 24,000 or 28,000 units. The wide range of order quantitiessuggested indicates considerable disagreement concerning the marketpotential. The product management team asked you for an analysis ofthe stock-out probabilities for various order quantities, anestimate of the profit potential, and to help make an orderquantity recommendation. Novelty expects to sell Weather Teddy for$24 based on a cost of $16 per unit. If inventory remains after theholiday season, Specialty will sell all surplus inventories for $5per unit. Noveltys sales forecaster predicted the demand forWeather Teddy with an expected value of 20,000 units and a standarddeviation of 5,100 units.
Compute the projected profit for the four order quantitiessuggested by the management team under three scenarios: worst casein which sales = 10,000 units, most likely case in which sales =20,000 units, and best case in which sales = 30,000 units
For example, assuming the order quantity of 15,000 and the worstcase scenario, the projected profit is 10,000($24) + 5,000($5) 15,000($16) = $25,000. On the other hand, assuming the orderquantity of 18,000 and the best case scenario, the projected profitis 18,000($24) 18,000($16) = $144,000. You are expected to showall 4(3) = 12 projected profits.
Novelty Toys, Inc. sells a variety of new and innovativechildrens toys. Management learned that the preholiday season isthe best time to introduce a new toy, because many families usethis time to look for new ideas for December holiday gifts. WhenNovelty discovers a new toy with good market potential, it chosesan October market entry date.
In order to get toys in its stores by October, Novelty placesone-time orders with its manufactures in July of each year. Demandfor children toys can be highly volatile. If a new toy catcheson, a sense of shortage in the marketplace often increases thedemand to high levels and large profits can be realized. However,new toys can also flop, leaving Novelty stuck with high levels ofinventory that must be sold at reduced prices. The most importantquestion the company faces is deciding how many units of a new toyshould be purchased to meet anticipated sales demand. If too feware purchased, sales will be lost; if too many are purchased,profits will be reduced because of low prices realized in clearancesales.
For the coming season, Novelty plans to introduce a new productcalled Weather Teddy. This variation of a talking teddy bear ismade by a company in Taiwan. When a child presses Teddys hand, thebear begins to talk. A built-in barometer selects one of fiveresponses that predict weather conditions. The responses range from. It looks to be a very nice day! Have fun I think it may raintoday. Dont forget your umbrella. Tests with the product showthat, even though it is not a perfect weather predictor, itspredictions are surprisingly good. Several of Noveltys managersclaimed Teddy gave predictions of the weather as good as localtelevision weather forecasters.
As with other products, Novelty faces the decision of how manyWeather Teddy units to order for the coming holiday season. Membersof the management team suggested order quantities of 15,000,18,000, 24,000 or 28,000 units. The wide range of order quantitiessuggested indicates considerable disagreement concerning the marketpotential. The product management team asked you for an analysis ofthe stock-out probabilities for various order quantities, anestimate of the profit potential, and to help make an orderquantity recommendation. Novelty expects to sell Weather Teddy for$24 based on a cost of $16 per unit. If inventory remains after theholiday season, Specialty will sell all surplus inventories for $5per unit. Noveltys sales forecaster predicted the demand forWeather Teddy with an expected value of 20,000 units and a standarddeviation of 5,100 units.
Compute the projected profit for the four order quantitiessuggested by the management team under three scenarios: worst casein which sales = 10,000 units, most likely case in which sales =20,000 units, and best case in which sales = 30,000 units
For example, assuming the order quantity of 15,000 and the worstcase scenario, the projected profit is 10,000($24) + 5,000($5) 15,000($16) = $25,000. On the other hand, assuming the orderquantity of 18,000 and the best case scenario, the projected profitis 18,000($24) 18,000($16) = $144,000. You are expected to showall 4(3) = 12 projected profits.
