Option 1. Geoff offers to set his price at $65 and agrees to credit Land’s End $53 for each unit...

Question

Option 1. Geoff offers to set his price at $65 and agrees to credit Land’s End $53 for each unit Land’s End returns to Geoff at the end of the season (because those units did not sell). Since styles change each year, there is essentially no value in the returned merchandise.

Option 2.

Geoff offers a price of $55 for each unit, but returns are no longer accepted. In this case, Land’s End throws out unsold units at the end of the season. This season’s demand for this model will be normally distributed with mean of 200 and standard deviation of 125. Land’s End will sell those sunglasses for $100 each. Geoff ‘s production cost is $25.

a. How much would Land’s End buy if they chose option 1?

b. How much would Land’s End buy if they chose option 2?

c. Which option will Land’s End choose?

d. Suppose Land’s End chooses option 1 and orders 275 units. What is Geoff Gullo’s expected profit?

Parul · Accepted Answer

Normal.dotm A4 US English
Answer 1. (a) End sale price for the land = $100
Cost of purchase = $65
Value of Salvage = $53
Cost of underage, Cu = $100 -$65 = $35
Cost of overage, Co = 65-53 = 12
Critical ratio = Cu/ (Cu + Co) = 35/47 = 0.7422
Z signify the value at 0.7422 = 0.66 ( I have utilized the normal distribution function)
Hence, the optimal quantity of order = 200 + (0.66*125) = 282.5
Answer 1. (b) End sale price of land = $100
Cost of purchase = $55
Value of Salvage = $0
Cost of underage cost,

Option 1. Geoff offers to set his price at $65 and agrees to credit Land’s End $53 for each unit Land’s End returns to Geoff at the end of the season (because those units did not sell). Since styles...

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