Background:

George Lassiter is a project engineer for a major defense contractor. He owns a lucrative side
business where he designs, manufactures, and hawks special event t-shirts. These shirts are
sold at rock concerts, major sporting events, and special fundraising events. The shirts are
neither endorsed by event sponsors nor allowed to be sold inside the arenas. Their
competitive advantage lies in their product design, quality, and price. The product is
strategically distributed in streets surrounding the arenas and nearby parking lots. The shirts
are sold to vendors for $100 per dozen; Vendors sell them to the public for $10 per shirt.
Unsold shirts are purchased by a discount clothing store for $1.50 per shirt. George uses a silk
screener/shirt supply house to produce the shirts on a large scale. He purchases batches of
2,500 shirts with the following volume discounts:
Order Size

Cost

10,000

$32,125

7500

$25,250

5000

$17,750

The Problem:
George Lassiter faces a dilemma about the number of shirts to produce for a rock concert
scheduled in two months. George Lassiter is certain about the sale of 20,000 tickets for the
standing area around the stage. His primary concern is the number of grandstand seats that
will be sold. Based upon his view of the groups popularity and advance hype, he thinks that
there are three possibilities for the sale of grandstand seats-80,000, 50,000 and 20,000. In
addition, George is unsure the percentage of attendees who will buy one of his shirts.
Typically, fifteen, ten, or five percent of the total attendees purchase a shirt. George puts the

probabilities of those percentages occurring at .1, .3, and .6. George Lassiter is unsure of the
quantity of t-shirts to purchase from his supplier to earn the most profit.
The Solution:
To figure out the quantity of t-shirts to purchase from the supplier so that the quantity results
in the most profit, we calculated the different scenarios in an Excel spreadsheet and drew a
decision tree shown in Appendix Figure-1. Since George thinks there are three possibilities
for the number of grandstand seats to be sold, we made three charts categorized by the order
sizes. We broke down the charts by the potential number of tickets sold per possibility. The
sales of 20,000 standing tickets have been taken for granted. In addition to 20,000 tickets,
there are three possibilities of the number of grandstand tickets likely to be sold. We assumed
the following probabilities for high, medium and low value.
Items
Grandstand Attendance-High
Grandstand Attendance-Medium
Grandstand Attendance-Low

Quantity
80,000
50,000
20,000

Probability (assumptions)
.3
.5
.2

Since the concert is very likely to be a huge success, the high demand of 80,000 is more
likely than the low demand of 20,000. We assigned a higher degree of probability to the
quantity of 80,000 in attendance than to 20,000. As detailed in the Appendix-Figure 2.1-2.3,
the charts revolved around these 3 possibilities because typically fifteen, ten, or five percent
of the total attendees purchase a shirt. This is labeled as percentage of demand on the charts.
Next we calculate the demand by multiplying the demand percentage by total attendance. The
order sizes manufactured by the supplier are 10,000, 7500, and 5000. We multiply the smaller
of demand or order size by the sales price to get total sales. If orders exceed demand, the
shirts are sold at a discounted price of $1.50. This resale is added to total sales to get total
revenue. The costs are then subtracted from total revenue to get gross profit. Probabilities
have been applied to calculate the expected monetary value for each of the order size.

Expected monetary value analysis:

As shown in the decision tree in the appendix, the different combinations of demands and the
number of attendees have been calculated. Using the expected Monetary Value Criterion, we
propose

that

George

Lassiter

choose the strategy that produces

the highest profit. According to the

Order
Size
10000
7500
5000

Expected
value of Profit
26552.85
25238.35
20314.25

Highest
Profit
51175
37225
23900

Lowest
Profit
-3465
-340
3410

calculation shown in the tabular format in appendix-Figure 2.1-2.3, Order size 10,000
provides the highest EMV. The second best EMV is generated by the order size 7500. The
summarized table shown in figure says that the highest profit the 10,000 order size can
produce is 51175, much higher than the EMV.
EMV
EVUC
EVPI

26552
28502
1950

However, the probability of getting the highest profit is only 10%. The EMV calculations
must consider the probability of experiencing varying demand scenarios and number of
attendees. At the same time, it is also possible that the 10,000 order size produces a loss of
3465.
Order Size 7500 provides a fair amount of profit, slightly lower than the order size 10,000.
Although the amount of profit generated by order size 10,000 and 7500 is similar, the highest
profit scenario for order size 10,000 is higher than that of 7500 order size. The highest profit
for this order size may reach up to 37,225 while the lowest profit can go as low as -340. As
the EMV calculation doesnt consider only the single scenario for decision making, the
expected value of profit for 7500 order size turned out to be 25,238.
Order size 5000 provides the lowest expected value of profit. However, the lowest possible
profit for this order size was found to be higher than those for previous two order sizes. The

worst case scenario for order size 5000 is the profit of 3410, better than the losses incurred by
order size 10000 and 7500.
Expected value of Perfect Information:
We have calculated the expected value of perfect information which is the price Lassiter can
spend to gain access to perfect information. The EVPI is the difference between EMV and
EVUC. To calculate the EVPI, expected value under certainty needs to be calculated. As
shown in the decision tree in Appendix, the EVUC in this case is 28,502.
EVUC = (40930*0.3+26980*0.5+13665*0.2) = 28502
EMV= (40930*0.3+25563*0.5+7463*0.2) =26553 [Assuming the probability .3, .5 & .2 for
High, Medium and Low demand]
EVPI= EVUC-EMV
= (28,502-26,553) = 1950.
Theoretically, perfect information eliminates uncertainty. If Lassiter has the opportunity to get
the perfect information he can spend no more than 1950 to get it.
Factors contributing to the highest EMV: The factors that contributed to the highest EMV
for order size 10,000 include
a. 10% chance of 15% buying shirts and 60% chance of 10% buying shirts provided
scenarios with no shirts left over. The full price of 8.33 for bulk of the shirts increased
the revenue for this order size.
b. Lower (0.2) chance of 40,000 attendees also increased the chance of higher
attendance, affecting the profitability positively.

An Alternative Scenario:
We have also calculated the alternative scenario with 25% chance of 40k attendance, 50%
chance of 70k attendance and 25% chance of 100k attendance. Although we did not show this
alternative calculation scenario in our decision tree and tables, the summarized expected
value for all three order size is given below.
Order size
10000
7500
5000

Expected Value
24900
24181.25
19816.67

Probability
.25
.50
.25

Under the alternative probability scenario, as shown above, the optimum order size with the
highest EMV still remains the 10,000 with an expected monetary value of 24900.
Conclusion:
Based on the probability and percentage of the attendees who would buy one of his shirts,
Georges decision to order for 5,000 shirts will not be the most effective one. Possible per
unit profit, considering the best case scenario, for the high value demand is also higher than
the per unit profit for low value demand. As the Georges optimism about the popularity of
the event is neither very high not very low, any order quantity higher than 10,000 is not
suggested in order to avoid losses. Considering all the factors and estimations, we suggest
that George order 10,000 shirts.