Enriquez, Hope Trinity B.

Bus statistic Sec 47

SPECIALTY TOYS

1. Use the sales forecaster’s prediction to describe a normal probability distribution that can
be used to approximate the demand distribution. Sketch the distribution and show its
mean and standard deviation.
Answer:
Mean = 20000 (Expected demand)
P (10k < X < 30k) = 0.95
By symmetry
P (20k< X < 30k) = 0.475
P (0< Z < 10k/σ ) = 0.475
From the normal tables the value of Z is corresponding to 0.475
Standard deviation is 10000/1.96
= 5102. 04 or 5102

In the above calculation 95% of the normal distribution falls between 10000
and 30000, 47.5% falls between 20000 and 30000. From the normal distribution table,
the value of 47.5% is determined as 1.96 (Standard deviation). Thus, the required
standard deviation is around 5102. The mean for the purpose of calculation is 20000 units
which is the expected demand for the company’s sell.
2. Compute the probability of a stock-out for the order quantities suggested by members of
the management team.
Answer:
In the company of Specialty Inc, the management depending upon the
suggested quantities calculates the stock out probabilities for every quantity.
Specialty Inc formulated various ranges of order quantity  so as that the stock
out risks are often managed.

The profit of stock out with an order of K units is P(X > K)

P (X > K) = P (Z > (K – 20000) / 5102 Z is the standard normal

The quantities suggested by the management of Specialty Inc are 15000, 18000, 24000
and 28,000

Order (K) (K-20000)/5102 P(X>K)

15,000 -0.98001 0.83
18,000 -0.392 0.65
24,000 0.784006 0.21
28,000 1.568012 0.05

3. Compute the projected profit for the order quantities suggested by the management team
under three scenarios: worst case in which sales = 10,000 units most likely case in which
sales = 20,000 units, and best case in which sales = 30,000 units.
Answer:

A. Project profits for order quantity of 15,000

The initial cost price is $ 16, initial selling price is $ 24 and after holiday the company
will sell the surplus at $ 5 selling price.

Profit initially = (24-16) = $ 8

Profit later = (16- 5) = $ 11

Worst case scenario Most likely case scenario Best case scenario
(10,000) (20,000) (30,000)
 (8*10000) – (11*5000) (8 * 15000) (8 * 15000)
=25, 000 = 120000 = 120,000

B. Project profits for order quantity of 18,000

The initial cost price is $ 16, initial selling price is $ 24 and after holiday the
company will sell the surplus at $ 5 selling price.
Profit initially = (24-16) = $ 8
Profit later = (16- 5) = $ 11

Worst case scenario Most likely case scenario Best case scenario
(10,000) (20,000) (30,000)
(8*10000) - (11*8000) (8 * 18000) (8 * 18000)
= -8000 = 144000 = 144000

C. Project profits for order quantity of 24,000

The initial cost price is $ 16, initial selling price is $ 24 and after holiday the
company will sell the surplus at $ 5 selling price.
Profit initially = (24-16) = $ 8
Profit later = (16- 5) = $ 11

Worst case scenario Most likely case scenario Best case scenario
(10,000) (20,000) (30,000)
(8*10000) - (11*14000) (8 * 20000) – (11 *4000) (8 * 24000)
= -74000 = 11600 = 192000

D. Projected profits for order quantity of 28,000

The initial cost price is $ 16, initial selling price is $ 24 and after holiday the
company will sell the surplus at $ 5 selling price.
Profit initially = (24-16) = $ 8
 Profit later = (16- 5) = $ 11

Worst case scenario Most likely case scenario Best case scenario
(10,000) (20,000) (30,000)

(8*10000) - (11*18000) (8 * 20000) – (11 * 8000) (8 * 28000)

= -118000 = 72000 = 224000

4. One of Specialty’s managers felt that the profit potential was so great that the order
quantity should have a 70% chance of meeting demand and only a 30% chance of any
stock-outs. What quantity would be ordered under this policy, and what is the projected
profit under the three sales scenarios?
Answer:
In accordance with the management, the ordering quantity which can meet 70% demand
and features a probability of 30% stock out are be found as

P(X < K) = 0.70

(K – 20000) / 5102 = 0.5244 (As the value of Z in normal distribution table)

K = (20000 + 5102) * 0.5244

= 20000+2675

= 22675 (Economic order quantity)

Worst case scenario Most likely case scenario Best case scenario
(10,000) (20,000) (30,000)

(8*10000) - (11*12675) (8 * 20000) – (11 * 2675) (8 * 22675)

= -59425 = 130575 = 181400
5. Provide your own recommendation for an order quantity and note the associated profit
projections. Provide a rationale for your recommendation.
Answer:
Specialty Toys Inc, should maintain an order quantity ranging from 20000 and
25000, after that the company determined that an order quantity around 22675 has
increases the profit to 70% and the stock out probability reduces to 30%. Accordingly,
the most likely scenario allowed by the company is 20000. Hence maintaining the order
quantity between 20000 and 25000, this will result to put the company at risk. The
company will also be able to maintain a stable amount of profit in this set of stock. The
probability of stock out for the company in the option of most likely is also low about
21%. If the company adopts the best possible scenario and purchase products ranging
between 26000 and 30000, and if the product fails in the market then the company may
stick within the high level of inventory along with high levels of cost of production and
incapacity to recover the variable costs. If situation happen, the company would need to
sell the goods at reduced price. By that, it is advisable to maintain a lower level of
ordering quantity and after looking at the demand level, the company can increase the
amount of ordering quantity