Exercise OP

The Gigantic Pocket Monster (Gipokmon) is a new toy that Mattel has introduced. Mattel currently allows toy retailers to place an order in August for delivery in November for the holiday season. It costs Mattel $1.50 to manufacture and ship each Gipokmon. Mattel charges awholesale price of $10. The Toys ‘R’ Us manager plans to sell the toy for $20. The end-customer demand for this toy is estimated to be 11000 units with a probability of 0.4, and 8000 units with a probability of 0.6.

  • How many units should Toys ‘R’ Us order to maximize its expected profit? What is the resulting profit for Mattel, Toys ‘R’ Us, and the supply chain, respectively?

(b) Suppose now Mattel buys back unsold Gipokmon for $4 per unit. Please answer again the questions in (a).

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