Report the expected profit for the buyer

Reference no: EM133674698

Zamatia Ltd. is an Italian upscale maker of eyewear. UV Inc., short for Umbra Visage, is one of their retailers in the United States. To match UV's stylish assortment, UV only operates small boutique stores located in trendy locations. We consider one particular store located in Miami Beach, Florida. Due to long replenishment lead time, UV receives only one delivery of Zamatia glasses before each season.
Consider Zamatia's entry-level sunglasses for the coming season, the Bassano. UV purchases each one of those pairs of sunglasses from Zamatia for $75 and retails them for $115. Zamatia's production and shipping costs per pair are $35. At the end of the season, UV generally needs to offer deep discounts to sell remaining inventory; UV estimates that it will only be able to fetch $25 per leftover Bassano at the Miami Beach store. UV's Miami Beach store believes this season's demand for the Bassano can be represented by a normal distribution with a mean of 250 and a standard deviation of 125.

Buy-back contracts: in this contract, the seller agrees to buy back unsold goods from the buyer for

some agreed-upon price higher than the salvage value.

? Buyer's risk is decreased and thus he is willing to order more (buyer makes ordering decision).

? Supplier's risk is increased.

? The contract must be designed such that all parties benefit.

• Sunglass example

• The supplier Zamatia agrees to buy back any leftover inventory at the price of $40 per unit, which is higher than the salvage value of $25.

• In this case, the retailer UV earns 115-75 = $40 for each unit sold, and loses 75-40 = $35 for each unit of unsold. This is the information you need to apply newsvendor model.

• Zamatia earns 75-35 = $40 for each unit sold and earns 75-35-40+25 = $25 for each unit unsold.

............................

• Given the above information, apply newsvendor model to determine the optimal order quantity and calculate UV's expected profit.

• According to the order quantity determined above, calculate the profit of Zamatia.

Answer the following three questions and round your answer to the nearest integer.

Hint: apply the newsvendor model for the buyer to determine the optimal order quantity. Given this order quantity, calculate the expected sales and expected leftover (unsold) using the formulas covered in week 2 (Performance Measures for a Given Order Quantity Q). For the buyer, it earns $40 for each unit sold, and loses $35 for each unit unsold, you can now calculate the expected profit for the buyer. For the supplier, it earns $40 for each unit sold and earns $25 for each unit unsold, you can now calculate the expected profit for the supplier.

1. Report the expected profit for the buyer.

2. Report the expected profit for the supplier.

3. Report the expected profit for the entire supply chain (buyer + supplier).

Reference no: EM133674698

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