Needless Markup (NM), a famous “high end” department store, must decide on the q
ID: 334512 • Letter: N
Question
Needless Markup (NM), a famous “high end” department store, must decide on the quantity of a high-priced woman’s handbag to procure in Spain for the coming Christmas season. The unit cost of the handbag to the store is $28.50 and the handbag will sell for $150.00. Any handbags not sold by the end of the season are purchased by a liquidator for $10.00 each. In addition, the store accountants estimate that there is a cost of $0.40 for each dollar tied up in inventory, as this dollar invested elsewhere could have yielded a gross profit. Assume that this cost is attached to unsold bags only. Due to the long distance and limited capacity, NM must place the order 6 months in advance. A detailed analysis of past data shows that if forecasting 6 months in advance, the number of bags sold can be described by a normal distribution, with mean 150 and standard deviation 60.
a) Another supplier in the U.S. offers the same product but at a higher price of $35 due to its higher production cost. For this supplier, NM only needs to place the order 3 months in advance which results in a much better forecast. Past data shows if ordering 3 months in advance, the number of bags sold can be described by a normal distribution, with mean 150 and standard deviation 20. Which supplier should NM choose?
Explanation / Answer
Option 1: Spain
6 month duration demand analysis:
So profit is 218*121.5 =
For option 2: US
For 3 months demand analysis::
SO profit: 206*115=
So in 6 months = 2*23666 =
Hence option 2 is better.
m mean 150 s Std Dev 60 C Cost 28.5 P Price 150 V Salvage 10.4 (10+0.4) Formula used Cu Cost of under order 121.5 (P-C) Co Cost of over order 18.1 (C-V) CR Critical ratio 0.8703 (Cu/(Cu+Co) So actual order m+Z*s 218 NORMINV(CR,m,s) If Optimal Order is 218Related Questions
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