Champion manufactures winter fleece jackets tor sale in the United States. Deman

Question

Champion manufactures winter fleece jackets tor sale in the United States. Demand for jackets during the season is normally distributed, with a mean of 20.000 and a standard deviation of 10,000. Each jacket sells for $60 and costs $30 to produce. Any leftover jackets at the end of the for $25 at the year-end clearance sale. Holding jackets until year-end sale adds another $5 to their cost. A recent recruit has suggested shipping leftover jackets to South America for sale in the winter there rather than running a clearance. Each jacket will fetch a price of $35 in South America, and all jackets sent there are likely to sell. Shipping costs add $5 to the cost of any jacket sold in South America. Would you recommend the South American option? How will this decision affect production decisions at Champion? How will it affect profitability at Champion? On average, how many jackets will Champion ship to South America each season?

Explanation / Answer

Inputs Current Policy South America Option Anticipate demand 20,000 20,000 Standard deviation 10,000 10,000 Unit costs $30 $30 Sales price $60 $60 Disposal value $25 $30 Inventory holding costs $5 $5 South America sale price $35 Shipping costs $5 Salvage value $20 $25 Cost of understocking $30 $30 Cost of overstocking $10 $5 Outputs Optimal cycle service level 0.7500 0.8571 Optimal production size 26,745 30,676 Expected profits $472,889 $521,024 Expected overstock 8,236 11,407

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