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How many pairs of sunglasses should REI buy

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Question - Frank Rogers owns a small firm that manufactures "Rogers Sunglasses." Frank has been approached by REI about selling a seasonal sunglass design through their stores. Frank offers REI two purchasing options:

Option 1: Frank sells the sunglasses to REI for $60 each and agrees to credit REI $35 for each pair REI returns to Frank at the end of the season (because those units did not sell). Since styles change each year, there is essentially no value in the returned merchandise.

Option 2: Frank offers a price of $50 for each unit, but no longer accepts returns. In this case, REI throws out unsold units at the end of the season.

Assume the annual demand for this design will be normally distributed with mean of 200 and standard deviation of 125. REI will sell those sunglasses for $100 each. Frank's production cost is $25

How many pairs of sunglasses should REI buy to maximize their expected profits under option 1? Option 2?

Reference no: EM132608733

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