MGT 446 Supply Chain Strategy Homework 4 (2015)

MGT 446 Supply Chain Strategy

Homework 4 

1. Store A has signed a revenue?sharing contract with a movie studio for DVDs. Each DVD

costs the studio $2 to produce, and will be sold to Store A for $5. Store A in turn prices a

DVD at $15 and forecasts demand to be normally distributed with mean 5,000 and

standard deviation (std) of 2,000. Store A will share 35% of the revenue with the studio,

keeping 65% for itself.

(a) How many DVDs should Store A order?

(b) What is the profit that Store A expects to make?

(c) What is the profit that the studio expects to make?

2. A publisher sells books to Borders at $12 each. The marginal production cost for the

publisher is $1 per book. Borders prices the book to its customers at $24 and expects

demand to be normally distributed with mean 20,000 and std of 5,000. Borders places a

single order with the publisher for delivery at the beginning of the season. Currently,

Borders discounts any unsold books at the end of the season down to $3.

(a) How many books should Borders order? What is its expected profit? How many

books does it expect to sell at a discount?

(b) What is the profit that the publisher makes given Border’s actions?

(c) If the publisher buys back any unsold books from Borders at a price of $5 per book,

and sells them at the discount price of $3. Under this arrangement, how many books

will Border order? What is the expected profit for Borders? How many books are

expected to be returned to the publisher? What is the expected profit for the

publisher? What should the publisher do? (Hint: you need to add publisher’s profit

in the simulation spreadsheet)

3. A manufacturer decides to ration a total supply of 100,000 units of its most popular toy

to its retailers. The toy is sold at a margin of $4 in the discount retail channel, and at a

margin of $6 in the high?service channel. The manufacturer has forecasted that the

demand for the toy at the high?service channel is normally distributed with mean 40,000

and std 15,000. How many toys should the manufacturer ration to high?service channel?

4. A department store has purchased 5,000 swimsuits to be sold during the summer. The

season lasts three months and the store manager forecasts that customers buying early

in the season are likely to be less price?sensitive and those buying later in the season are

likely to be more price?sensitive. The demand curves in each of the three months are

forecasted to be:

d1 = 2,000 – 10 p1

d2 = 2,000 – 20 p2

d3 = 2,000 – 30 p3

(a) If the store is to charge a fixed price over the entire season, what should it be? What

is the resulting revenue?

(b) If the store wants to vary prices by month, what should they be? How does this

affect revenue compared to (a)?