Using the Newsboy Model
1.Needless Markup (NM), a famous “high end†department store,must decide on the quantity of a high-priced woman’s handbag toprocure in Spain for the coming Christmas season. The unit cost ofthe 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 arepurchased by a liquidator for $10.00 each. In addition, the storeaccountants estimate that there is a cost of $0.40 for each dollartied up in inventory, as this dollar invested elsewhere could haveyielded a gross profit. Assume that this cost is attached to unsoldbags only.
Answer the following questions:
- Due to the long distance and limited capacity, NM must placethe order 6 months in advance. A detailed analysis of past datashows that if forecasting 6 month in advance, the number of bagssold can be described by a normal distribution, with mean 150 andstandard deviation 60. What is the optimal number of bags topurchase?
- What is the expected cost of mismatch under the optimalpurchase quantity? What is the optimal expected profit?
- Another supplier in the U.S. offers the same product but at ahigher price of $35 due to its higher production cost. For thissupplier, NM only needs to place the order 3 months in advancewhich results in a much better forecast. Past data shows ifordering 3 months in advance, the number of bags sold can bedescribed by a normal distribution, with mean 150 and standarddeviation 20. Which supplier should NM choose?
