Question

(All answers were generated using 1,000 trials and native Excel functionality.) In preparing for the upcoming holiday season, Fresh Toy Company (FTC) designed a new doll called The Dougie that teaches children how to dance. The fixed cost to produce the doll is $100,000. The variable cost, which includes material, labor, and shipping costs, is $34 per doll. During the holiday selling season, FTC will sell the dolls for $42 each. If FTC overproduces the dolls, the excess dolls will be sold in January through a distributor who has agreed to pay FTC $10 per doll. Demand for new toys during the holiday selling season is uncertain. The normal probability distribution with an average of 60,000 dolls and a standard deviation of 15,000 is assumed to be a good description of the demand. FTC has tentatively decided to produce 60,000 units (the same as average demand), but it wants to conduct an analysis regarding this production quantity before finalizing the decision. (a) Create a what-if spreadsheet model using formulas that relate the values of production quantity, demand, sales, revenue from sales, amount of surplus, revenue from sales of surplus, total cost, and net profit. What is the profit when demand is equal to its average (60,000 units)? $ (b) Modeling demand as a normal random variable with a mean of 60,000 and a standard deviation of 15,000, simulate the sales of The Dougie doll using a production quantity of 60,000 units. What is the estimate of the average profit associated with the production quantity of 60,000 dolls? Round your answer in whole dollar. $ How does this compare to the profit corresponding to the average demand (as computed in part a)? The input in the box below will not be graded, but may be reviewed and considered by your instructor. (c) Before making a final decision on the production quantity, management wants an analysis of a more aggressive 70,000-unit production quantity and a more conservative 50,000-unit production quantity. Run your simulation with these two production quantities. What is the average profit associated with each? Round your answer in whole dollar. When ordering 50,000 units, the average profit is approximately $ When ordering 70,000 units, the average profit is approximately $ (d) Besides average profit, what other factors should FTC consider in determining a production quantity? Compare the four production quantities (40,000; 50,000; 60,000; and 70,000) using all these factors. What trade-offs occur? If required, round Probability of a Loss to three decimal places and Probability of a Shortage to two decimal places. Round your answer in whole dollar. Production Quantity Average Net Profit Profit Standard Deviation Maximum Net Profit Probability of a Loss Probability of a Shortage 40,000 $ $ $ 50,000 $ $ $ 60,000 $ $ $ 70,000 $ $ $ What is your recommendation? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Answer 1

Solution:

Given Facts Units Production Quantity 60000 Forecasted avg. Sales Std. Deviation of SE of of sales Forecat 60000 15000 LCL of Sales @ 95% confidence Level Avg Sales- 1.96(SE) 30600 UCL of Sales @ 95% confidence Level Variable Cost Fixed Cost Sales Price Avg Sales+1.96 SE) 89400 34 100000 42

Solutions to the Questions

Questiorn beat Solutions Stdev Mean Mean Profit with Production of 60,000 Units And Avg demand of 60,000 units 42*60000 [(34*60000)380000 +100000 Mean Profit with Production of 60,000 Units Simulating 500+ Sales Scenario 48593.1311 451247.118 Mean Profit with Production of 50,000 227480.896 320189.573 Mean Profit with Production of 70,000 -196432.25 451247.118 Mean Profit with Production of 40,000 197446.513 341462.517

Solution to D

Production Probability Probability Quantity Avg. Profit Std Dev | ļof Shortage 40000 341462.517 197446.513623510 0.08610568 0.08610568 50000 227480.896 320189.573603510 0.24070450.2407045 60000 48593.1311 451247.118583510 0.4148728 0.4148728 45563510 0.58512720.5851272 Max. Profitlof Loss D> 70000 -196432.25 554628.4

The excel Simulation Sample

Random number of Sales Forecast Production $34*produc Sales units Total Cost= Fixed cost + Profit Units tion Units Revenue Holiday Season January FTC profit/Loss Loss Total 261644 261644 57182 50723 31587 0000 21400002401644 00002140000 2130366 60000 2140000 1326654 -813346 0 0 0 813346 0 9634 -9634 7104-572896 37312 0000 21400001567 0 572896 44981 54927 76211 68292 60000 2140000 1889202 250798 0000 21400002306934 60000 2140000 2520000 60000 2140000 2520000 0250798 166934 542110 462920 166934 380000 380000 0 162110 82920 0 0 180574 46653 60000 2140000 1959426 -180574

Like wise we do simulation with demand forecast between UCL & LCL with different production levels to determine the avg. Profit, Std. Devaition of Profit, Max. Profit, Probability of Loss, Probabilty of Stock out.