A movie studio sells the latest movie on DVD to VidoesRuS at $10 per DVD.

The
marginal production cost for the movie studio is $1 per DVD. VideosRUs prices each
DVD at $19.99 to its customers. DVD’s are kept on the regular rack for a one month
period after which they are discounted down to $4.99. VideosRUs places a single
order for DVDs. Their current forecast is that sales will be normally distributed with a
mean of 10,000 and a standard deviation of 5,000.

(a) How many DVDs should VideosRUs order? What is their expected profit? How
many DVDs do they expect to sell at a discount?
(b) What is the profit that the studio makes given VideosRUs' actions?

Buyback Contracts
Inputs
Mean Demand, Mu 10000
Standard Deviation of demand 5000
VideosRUs's Cost, c = $ 10
VideosRUs's Sale price, p = $ 19.99
VideosRUs's Salvage value, s=b = $ 4.99
Studio's Cost, v $ 1
Studio's Sale price, c $ 10
Studio's buyback price, b $ -

Intermediate Calculations
Cost of Understocking, Cu p-c
Cost of Overstocking, Co c-s
CSL cu/(cu+co)
Z NORMSINV(CSL)
Outputs
Order size, O* Mu+Z*Sigma
overstock (O-Mu)*CSL+Sigma*NORMDIST(Z,0,1,0)
understock (Mu-O)*(1-CSL)+Sigma*NORMDIST(Z,0,1,0)
VideosRUs Expected Profit (Cu+Co)*Mu*CSL-(Cu+Co)*Sigma*NORMDIST(Z,0,1
Publisher's E(Profit) O*(c-V)-Overstock*Buyback
Total Supply Chain Profit = VideosRUs Expected Profit +Publisher's E (Profit)
MDIST(Z,0,1,0)
ORMDIST(Z,0,1,0)
*Sigma*NORMDIST(Z,0,1,0)-O*Co*CSL+O*Cu*(1-CSL)

+Publisher's E (Profit)
 A movie studio sells the latest movie on DVD to VidoesRuS at $10 per DVD. The marginal
production cost for the movie studio is $1 per DVD. VideosRUs prices each DVD at $19.99 to its
customers. DVD’s are kept on the regular rack for a one month period after which they are
discounted down to $4.99. VideosRUs places a single order for DVDs. Their current forecast is that
sales will be normally distributed with a mean of 10,000 and a standard deviation of 5,000.

(c) A plan under discussion is for the studio to refund VideosRUs $4 per DVD that does not sell
during the one month period. As before VideosRUs will discount them to $4.99 and sell any that
remain. Under this plan how many DVDs will VideosRUS order? What is the expected profit for
VideosRUsr? How many DVDs are expected to be unsold at the end of the month? What is the
expected profit for the studio? What should the studio do?

Buyback Contracts
Inputs
Mean Demand, Mu 10000
Standard Deviation of demand 5000
VideosRUs's Cost, c = $ 10
VideosRUs's Sale price, p = $ 19.99
VideosRUs's Salvage value, s=b = $ 8.99
Studio's Cost, v $ 1
Studio's Sale price, c $ 10
Studio's buyback price, b $ 4

Intermediate Calculations
Cost of Understocking, Cu p-c
Cost of Overstocking, Co c-s
CSL cu/(cu+co)
Z NORMSINV(CSL)
Outputs
VideosRUs's order size, O* Mu+Z*Sigma
Expected overstock (O-Mu)*CSL+Sigma*NORMDIST(Z,0,1,0)
Expected understock (Mu-O)*(1-CSL)+Sigma*NORMDIST(Z,0,1,0)
VideosRUs's Expected Profit (Cu+Co)*Mu*CSL-(Cu+Co)*Sigma*NORMDIST(Z,0,1
Studio's E(Profit) O*(c-V)-Overstock*Buyback
Total Supply Chain Profit = VideosRUs Expected Profit +Publisher's E (Profit)
 he marginal
VD at $19.99 to its
hich they are
urrent forecast is that
on of 5,000.

hat does not sell

and sell any that
xpected profit for
onth? What is the

MDIST(Z,0,1,0)
ORMDIST(Z,0,1,0)
*Sigma*NORMDIST(Z,0,1,0)-O*Co*CSL+O*Cu*(1-CSL)

+Publisher's E (Profit)