Teddy Bower sources a parka from an Asian supplier for $10 each and sells them t

Question

Teddy Bower sources a parka from an Asian supplier for $10 each and sells them to customers for $22 each. Leftover parkas at the end of the season have no salvage value. The demand forecast is normally distributed with average 2,100 parka and standard deviation 1,200 parka. Now Teddy Bower found a reliable vendor in the United States that can produce parkas very quickly but at a higher price than Teddy Bower’s Asian supplier. Hence, in addition to parkas from Asia, Teddy Bower can buy an unlimited quantity of additional parkas from this American vendor at $15 each after the season demand is known. If Teddy Bower uses both its Asian and American suppliers correctly, what is its expected mismatch cost?

a.About $7,500

b.About $8,500

c.About $6,500

d.About $9,500

Explanation / Answer

Max Profit - Expected Proft

So option C

Demand m mean 2100 s Std Dev 1200 C Cost 10 C1 Cost late 15 P Price 22 V Salvage 0 April to july Formula used Cu Cost of under order 5 C1-C Co Cost of over order 10 (C-V) CR Critical ratio 0.333333 (Cu/(Cu+Co) So actual order m+Z*s 1583 NORMINV(CR,m,s)

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