Business Problem: The new clothing line AB Designs has undertaken is a seasonal
ID: 3351156 • Letter: B
Question
Business Problem:
The new clothing line AB Designs has undertaken is a seasonal line of clothing for which demand can be high, medium, or low. AB Designs can order one, two, or three lots of the product before the season begins but cannot reorder later. Profit projections (in thousands) relative to the expected demand are shown below:
State of Nature
High Demand
Medium Demand
Low Demand
Decision Alternative
Order 1 lot
60
60
50
Order 2 lots
80
80
30
Order 3 lots
100
70
10
Your research has shown that prior probabilities for the three states of nature are 30%, 30%, and 40% respectively. Given that, determine what is the recommended order quantity?
Later, you receive information from the VP of sales in preparation for a budget meeting this week. She is excited that AB Designs is taking on the investment of the new clothing line and is optimistic about its success, given the competitive landscape of their industry. Market predictions from her research have always been either excellent or very good. The probabilities are as follows:
Excellent Market Conditions 70%
High Demand 34%
Medium Demand 32%
Low Demand 34%
Very Good Market Conditions 30%
High Demand 20%
Medium Demand 26%
Low Demand 54%
Given the VP of Sales market predictions for the success of the new clothing line, what is the optimal buying decision strategy?
High Demand
Medium Demand
Low Demand
Decision Alternative
Order 1 lot
60
60
50
Order 2 lots
80
80
30
Order 3 lots
100
70
10
Explanation / Answer
Probability of high demand = 70%* 34% + 30%*20% = 0.298
Medium demand = 70%* 32% + 30%*26% = 0.302
Low demand = 70%* 34% + 30%*54% = 0.40
If one lot - Profit = 0.298* 60 +0.302*60+50*04=56
Two lot,Profit = 0.298* 80 +0.302*80+30*0.4=60
Three lot,profit = 0.298* 100 +0.302*70+10*0.4= 54.94
Optimal strategy is to buy two lots.
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