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A publisher sells books to Barnes & Noble at $12 each.

The marginal production cost for the publisher


is $1 per book. Barnes & Noble prices the book at $24 and expects demand to be normally
distributed with a mean of 20,000 and a standard deviation of 5,000. Barnes & Noble places a
single order with the publisher. Currently, Borders discounts any unsold books down to $3 and any
unsold books sell at this price.

(a) How many books should Barnes & Nobles order? What is their expected profit? How many
books do they expect to sell at a discount?
(b) What is the profit that the publisher makes given Barnes & Noble's' actions?

Buyback Contracts
Inputs
Mean Demand, Mu 20000
Standard Deviation of demand 5000
Barnes & Noble's Cost, c = $ 12
Barnes & Noble's Sale price, p = $ 24
Barnes & Noble's Salvage value, s=b = $ 3
Publishers Cost, v $ 1
Publishers Sale price, c $ 12
Publishers buyback price, b $ -

Intermediate Calculations
Cost of Understocking, Cu $ 12
Cost of Overstocking, Co $ 9
Outputs
Order size, O* 20900
overstock 2477
understock 1577
Barnes & Noble's Expected Profit $ 198,784
Publisher's E(Profit) $ 229,901
Total Supply Chain Profit = $ 428,685
A publisher sells books to Barnes & Noble at $12 each. The marginal production cost for the publisher is $1
per book. Barnes & Noble prices the book at $24 and expects demand to be normally distributed with a
mean of 20,000 and a standard deviation of 5,000. Barnes & Noble places a single order with the
publisher. Currently, Borders discounts any unsold books down to $3 and any unsold books sell at this
price

(c) A plan under discussion is to refund Barnes & Noble's $5 per unsold book. As before Barnes & Noble
will discount them to $3 and sell any that remain. Under this plan how many books will Barnes & Noble
order? What is the expected profit for Barnes & Noble? How many books are expected to be unsold?
What is the expected profit for the publisher? What should the publisher do?

Buyback Contracts
Inputs
Mean Demand, Mu 20000
Standard Deviation of demand 5000
Barnes & Noble's Cost, c = $ 12
Barnes & Noble's Sale price, p = $ 24
Barnes & Noble's Salvage value, s=b = $ 8
Publishers Cost, v $ 1
Publishers Sale price, c $ 12
Publishers buyback price, b $ 5

Intermediate Calculations
Cost of Understocking, Cu $ 12
Cost of Overstocking, Co $ 4
Outputs
Barnes & Noble's order size, O* 23372
Expected overstock 4118
Expected understock 746
Barnes & Noble's Expected Profit $ 214,578
Publisher's E(Profit) $ 236,506
Total Supply Chain Profit = $ 451,084

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