Chapter 6 Continuous Probability Distributions
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 the weather conditions. 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 that were as good as those of many 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 asks you for an analysis of the stock out probabilities for various order quantities, an estimate of the profit potential, and help with making 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 inventory for $5 per unit. After reviewing the sales history of similar products, Specialty’s senior sales forecaster predicted an expected demand of 20,000 units with a .95 probability that demand would be between 10,000 units and 30,000 units.
Prepare a managerial report that addresses the following issues and recommends an order quantity for the Weather Teddy product.
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.
2. Compute the probability of a stock out for the order quantities suggested by members of the management team.
3. Compute the projected profit for the order quantities suggested by the management team under three scenarios: worst case in which sales 5 10,000 units, most likely case in which sales 5 20,000 units, and best case in which sales 5 30,000 units.
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?
5. Provide your own recommendation for an order quantity and note the associated profit projections. Provide a rationale for your recommendation