What is the optimal expected profit

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Reference no: EM132118044

Needless Markup (NM), a famous “high end” department store, must decide on the quantity of a high-priced woman’s handbag to procure in Spain for the coming Christmas season. The unit cost of the handbag to the store is $28.50 and the handbag will sell for $150.00. Any handbags not sold by the end of the season are purchased by a liquidator for $10.00 each. In addition, the store accountants estimate that there is a cost of $0.40 for each dollar tied up in inventory, as this dollar invested elsewhere could have yielded a gross profit. Assume that this cost is attached to unsold bags only.

What is the expected cost of mis-match under the optimal purchase quantity? What is the optimal expected profit?

Another supplier in the US. offers the same product but at a higher price of $35 due to its higher production cost. For this supplier, Needless Markup only needs to place the order 3 months in advance which results in a much better forecast. Past data shows if ordering 3 months in advance, the number of bags sold can be described by a normal distribution, with mean 150 and standard deviation 20. Which supplier should NM choose?

Reference no: EM132118044

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