Management learned that the pre holiday season is the best time to introduce a new toy, because many families use this time to look for new ideas for December holiday gifts. When Specialty discovers a new toy with good market potential, it choses an October market entry date.
In order to get toys in its stores by October, Specialty places one-time orders with its manufactures in July of each year. Demand for children’s toys can be highly volatile. If a new toy catches on, a sense of shortage in the marketplace often increases the demand to high levels and large profits can be realized. However, new toys can also flop, leaving Specialty stuck with high levels of inventory that must be sold at reduced prices. The most important question the company faces is deciding how many units of a new toy should be purchased to meet anticipated sales demand. If too few are purchased, sales will be lost; if too many are purchased, profits will be reduced because of low prices realized in clearance sales.
For the coming season, Specialty plans to introduce a new product called Weather Teddy. This variation of a talking teddy bear is made by a company in Taiwan. When a child presses Teddy’s hand, the bear begins to talk. A built-in barometer selects one of five responses that predict weather conditions. The responses range from “It looks to be a very nice day! Have fun” to “I think it may rain today. Don’t forget your umbrella”. Tests with the product show that, even though it is not a perfect weather predictor, its predictions are surprisingly good. Several of Specialty’s managers claimed Teddy gave predictions of the weather as good as local television weather forecasters.
As with other products, Specialty faces the decision of how many Weather Teddy units to order for the coming holiday season. Members of the management team suggested order quantities of 15,000, 18,000, 24,000 or 28,000 units. The wide range of order quantities suggested indicates considerable disagreement concerning the market potential. The product management team asked you for an analysis of the stock-out probabilities for various order quantities, an estimate of the profit potential, and to help make an order quantity recommendation. Specialty expects to sell Weather Teddy for $24 based on a cost of $16 per unit. If inventory remains after the holiday season, Specialty will sell all surplus inventories for $5 per unit. Specialty’s sales forecaster predicted the demand for Weather Teddy with an expected value of 20,000 units and a standard deviation of 5,000 units.
Prepare a managerial report that addresses the following issues.
1.) Use the sales forecaster’s prediction to describe a normal probability distribution that can be used to approximate the demand distribution. Find the probability that the demand will vary between two most extreme order quantities suggested by members of the management team.