1.John started his business in outdoor material. He bought Wetsuits from O’neill
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1.John started his business in outdoor material. He bought Wetsuits from O’neill and is selling the suits in his outdoor-shop. Each Wetsuit cost him $160. He sells the suits for $365. And is planning to sell the suits in the aftermarket (end of season) for $180. The type of the wetsuit is the JR HAMMER 3/2. He used the data of last year (appendix) to compute the order quantity. (show all calculations )
a)What is the underage cost?
b)What is the overage cost?
c)What is the quantity of JR HAMMER 3/2 wetsuits he had to order to maximize profit according to the News Vendor Model? You can find or calculate the A/F ratio by using the table in the appendix. The mean is 1220 wetsuits. Also the standard normal distribution table is in the appendix.
Appendix O Neill Wet Suits results last season: Product description R ZEN FL 3/2 EPIC 5/3 W/HD JR ZEN 3/2 WMS ZEN-ZIP 4/3 HEATWAVE 3/2 JR EPIC 3/2 WMS ZEN 3/2 ZEN-ZIP 5/4/3 W/HOOD WMS EPIC 5/3 W HD EVO 3/2 JR EPIC 4/3 WMS EPIC 2MM FULL HEATWAVE 4/3 ZEN 4/3 EVO 4/3 ZEN FL 3/2 HEAT 4/3 ZEN-ZIP 2MM FULL HEAT 3/2 WMS EPIC 3/2 WMS ELITE 3/2 ZEN-ZIP 3/2 ZEN 2MM S/S FULL EPIC 2MM S/S FULL EPIC 4/3 WMS EPIC 4/3 R HAMMER 3/2 HAMMER 3/2 HAMMER S/S FULL EPIC 3/2 ZEN 3/2 ZEN-ZIP 4/3 WMS HAMMER 3/2 FULL Forecast Actual demand Error A/F Ratio* 140 83 120 140 170 170 0.69 -3 163 212 0.96 1.25 0.97 195 270 320 -207 191 587 1.50 0.80 0.64 0.56 430 430 440 450 460 470 311 274 239 623 365 450 156 191 183 85 10 354 0.98 0.25 1.27 1.36 0.56 635 830 -220 286 128 227 650 660 680 740 1020 1060 1220 1300 1490 2190 3190 3810 6490 788 453 607 0.67 0.82 0.72 288 1552 492 499 1696 -396 342 0.59 1.30 1.23 1832 504 -1314 95 1995 3289 3673 2817 0.37 0.86 0.57 Forecast - Actual demand ** A/F Ratio = Actual demand divided by ForecastExplanation / Answer
To be calculated:
a) Underage cost
b) Overage cost
c) Quantity of JR HAMMER 3/2 wetsuits to order to maximise profit
Given values:
Wetsuit cost price - $160
Wetsuit selling price - $365
Wetsuit aftermarket price (salvage value) - $180
a) Underage cost is calculated as:
Cu = Selling price - Cost price
= $365 - $160
= $205
This means that in the case of under ordering the wetsuits, that is, ordering less than what he can actually sell, John could have earned a profit of $205 on every additional wetsuit.
b) Overage cost is calculated as:
Co = Cost price - Salvage value
= $160 - $180
= -$20
This means that even in the case of over ordering the wetsuits, that is, ordering more than what he can actually sell, John is going to make a profit of $20 even at the salvage value.
c) A/F ratio = Actual demand / Forecast
From the given table, we can find out the A/F ratio corresponding to the JR HAMMER 3/2, which comes to be 0.59
A/F ratio = 0.59
Mean = 1220
Therefore, as per news vendor model, the quantity of JR HAMMER 3/2 wetsuits that should be ordered to maximise profit can be calculated as:
Q = Forecast x A/F ratio
Q = 1220 x 0.59
Q = 719.8 = 720
Therefore, in order to maximise his profits, John should order 720 JR HAMMER 3/2 wetsuits.
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