2. (10 pts) Topgun Records and several movie studios have decided to sign a reve

Question

2. (10 pts) Topgun Records and several movie studios have decided to sign a revenue-sharing contract for CDs. Each CD costs the studio S1 to produce. The CD will be sold to Topgun for S1.5. Topgun in turn prices a CD at S12 and forecasts demand to be normally distributed, with a mean of 5,000 and a standard deviation of 2,000. Any unsold CDs are discounted to S0.50, and all sell at this price. Topgun will share 45 percent of the revenue with the studio, keeping 55 percent for itself. a) How many CDs should Topgun order? b) How many CDs does Topgun expect to sell at a discount? c) What is the profit that Topgun expects to make? d) What is the profit that the studio expects to make?

Explanation / Answer

m mean 5000 s Std Dev 2000 C Cost 1.5 P Price 12 V Salvage 0.5 Formula used Cu Cost of under order 10.5 (P-C) Co Cost of over order 1 (C-V) CR Critical ratio 0.9130 (Cu/(Cu+Co) So actual order m+Z*s 7719 NORMINV(CR,m,s) Ans A If Order is 7719

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