Reference no: EM132226566
CustomT Corporation is a web-based custom T-shirt retailer. In preparation for Halloween, the company needs to decide how many of a specific Frightful T-shirt to order in advance from its supplier, which is based in China. From past experience, CustomT estimates that demand for the Frightful T-shirt will be between 2,400 and 3,000 and may be modeled as normally distributed, with mean 2700 and std. dev. 100.
Each Frightful T-shirt, which can be sold at a price of $20.00, costs CustomT $6.00 to make, plus an additional variable overhead of about $3.00. CustomT also incurs a cost of $2.00 per shirt to transport it from the supplier in China. Any remaining “Frightful” T-shirts unsold after Halloween are scrapped, and CustomT receives $5.00 for each. Answer ANY 35 points from the questions III.1-III.6 below. Correct answers to question III.3 below will get 2 BONUS points.
Newsvendor Quantity: How many Frightful T-shirts should Custom T stock to maximize expected profit?
Expected Profit: If CustomT buys 2800 Frightful T-shirts, calculate the resulting expected profit.
Probability: If CustomT buys 2800 Frightful T-shirts, what is the chance that its profit will exceed $24,000? [Note: This question relates to profit, not expected profit.]
In-stock Probability: Suppose CustomT uses in-stock probability to pick its Frightful T-shirt order quantity for the supplier in China. Which of the following statements is TRUE, if CustomT increases its in-stock probability from 80% to 85%? Explain your choice.
A. Expected profit decreases. B. Order quantity decreases.
C. Order quantity remains unchanged. D. Expected profit increases.
Order Quantity with Local Supplier Option: In addition to buying from China, CustomT has a new extra option to buy later from a very quick, local North American (NA) supplier (about half-way through the selling season) at a total delivered price, including materials, overhead, and transport, of 13$ per Frightful T-shirt. Does it make sense for CustomT to use the local supplier to place an additional late order? If CustomT adopts this new supplier option, qualitatively explain how the initial Frightful T-shirt order quantity placed with the supplier in China change, relative to the case with no NA supplier? How does the expected total number of Frightful T-shirts sold change with the additional order with the NA supplier? Explain. Your answer choices for order quantity and sales changes include: reduce, increase, remain unchanged, and cannot say.