Question

specialty toys inc. sells a variety of new and innovative cildren’s toys. Management learned that thr preholiday season is the best time to introduce a new toy, because many families use this time to look for new ideas for December holiday gift. When Specialty discovers a new toy wit good market potential , it chooses an October market entry date.

In order to get toys in its store by October, Specialty places one-time ordes with its manufactures in June or July of each year. Demand for children’s toys can be highlty voltile. If a new toy catches on, a sense of shortage in the marketplace often increases the volatile. If a new. toy catches on, a sense of shortage in the marketplace often increases the demand to high levels and large profits can be realized. However, new toys can also flop, leaving Specialty stuck with high levels of inventory that must be sold at reduced prices. The most important question the company faces is deciding how many units of a new toy should be purchased to meet anticipated sales demand. If too few are purchased, sales will be lost; if too many are purchased, profits will be reduces of low prices realized in clearence sales.

For the coming season, Specialty plans to introduce a new product called Weather Teddy. This variation of a talking Teddy bear is made by a company in Taiwan. When a child presses Teddy’s hand, the bear begains to talk. a built-in barometer selects one of five responses that predict the weathe rconditions. The response range from “ It looks to be a very nice day! Have fun” to “ I think it may rain today, Don’t forget your umbrela.” Test with the product show that, even though it is not a perfect weather predictor, its predictions are surprisingly good. Several of Specialty ‘s managers claimed Teddy gave predictions of the weather that were good as many local television weather forecasters.

As with other products , Specialty faces the decision of how many Weather Teddy units to order for the coming holiday season. Memeber of the managment team suggested order quanities of 15,000, 18,000, 24,000, or 28,000 units. Yhe wide range of order quanities suggested indicates considerable disagreement concerning the marlket potential. The product management team asks you for an analysis of the stock-out probabilities for various order quantities, for an estimate of the profit potential, and for help with making an order quantity recommendation. Specialty expects to sell Weather Teddy for $24 based on a cost of $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 forcaster predicted an expected demand of 20,000 units with a .95 probability that demand would be between 10,000 units and 30,000 units.

MANAGERIAL REPORT.

prepare a managerial report that address the following issues and recommends an order quantity for the Weather Teddy product.

1. Use the sales forcaster’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 quantutues suggested by the management team under three scenarios: worst case in which sales = 10,000units, most likely case in which sales =20,000 units and best case in which 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- out. What quantity would be orderd under this policy, and what is the projected profit under the three sales scenarios?

5.. Provide your own recommendation for an order quantity and note the associated profit projections. Provide a rationale for your recommendation.

Answer 1

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