Reference no: EM133630238

Question: Superman Toys

Dominique, the head of operations at Superman Toys (ST), a firm specializing in toys for young kids (for ages 7 - 10 years), had an important decision to make. ST had successfully created a new robotic toy that combines the classic superman look with advanced sensors for remote-controlled movement. The toy was named SuperMax. ST was planning to introduce the SuperMax toy in red and black colors. Dominique needs to decide how many units to produce for the two versions of the SuperMax. This decision was complicated by four factors.

The innovative nature of the toy meant that ST faces a high uncertainty about its demand. ST had commissioned a market survey which estimated that at the current retail price of $8, the demand would be about 15,000 units in red color and 10,000 units in black. That said, demand for either of these colors could be as low as 5,000 or as high as 25,000 units.
Integrating advanced sensors required a time-consuming manufacturing process, meaning that ST would have to commit to a fixed quantity about six months in advance. Put differently, ST cannot make any change in the production quantity closer to the selling season.
At the end of the selling period, the toys can be sold in bulk to resellers at a heavily discounted price of $2, i.e., for a discount of 75%.
The cost of making these toys is also uncertain due to the global uncertainty in sourcing the toy's main semiconductor chip. Currently, they will cost $4 inclusive of royalties on technologies and materials used, as well as supply chain costs such as storage and distribution to the stores. The production department was investigating an alternative manufacturing process that could reduce costs by $2, i.e., the revised production cost could be $2. However, at this stage, there was only a 20% chance that the alternative manufacturing process would succeed. Based on this, Dominique calculated the expected cost to be $3.6.

Marwan, the Head of Production Planning at ST, suggested to Dominique that since the survey has been an elaborative one, they should produce units as per the expected demand, i.e., 15,000 units for the red color and 10,000 units for the black color SuperMax. This would lock in a profit of $110K. Table 1 shows Marwan's calculations, and Table 2 provides the formulas used in Marwan's model.

a) Do you agree with Marwan's analysis and the projected profit of $110K? If not, why not? (Explain why you consider or do not consider Marwan's analysis as a good complete analysis for the production decision)?