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Buy-back contract relative to the original

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A large internet retailer is about to place an order for laptops. Each machine is purchased for $1000 and can be sold at a 20% mark-up ($1200). However, due to the short shelf-life of electronic goods, if any of the laptops are unsold at the end of the season, they must be sold off for $600 at a loss of $400.

The demand for this product this season is estimated at 150 units with a standard deviation of 50 laptops.

Q1 - How many laptops should the retailer order in order to maximize expected profit?

Q2 - Suppose the supplier decides to offer a buy-back contract so that any unsold laptops are returned to the supplier who refunds the retailer $800 per laptop. How many more laptops would the retailer order under the buy-back contract relative to the original?

Reference no: EM132684046

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