Case Study: Specialty Toys

1. The demand distribution can be approximated by a normal distribution with mean µ = 20000
and standard deviation σ = 5102.

Let X be the demand for the toy. Then X follows normal distribution with mean μ = 20000 and
standard deviation σ. Then
P(10000 < X < 30000) = 0.95
P((10000-20000)/σ < (X-20000)/σ < (30000-20000)/σ) = 0.95
From tables of areas under the standard normal curve (30000-20000)/σ = 1.96
σ = (30000-20000)/1.96 =10000/1.96 = 5102

demand
0.00009
0.00008
0.00007
0.00006
0.00005
0.00004 demand
0.00003
0.00002
0.00001
0
0 10000 20000 30000 40000 50000 60000

2. The probability of a stock-out with an order of M units is P(X > M) is equal to P(Z) > (M-
20000/5102), where Z is distributed as standard normal:

Order (M) (M-20000)/5102 P(X > M)

15500 -0.88201 0.8106

18500 -0.29400 0.6141

24500 0.88201 0.1894

 28500 1.66601 0.0475

Working: -0.88 = .1894 = 1 - .1894

-.29 = .3859 = 1 - .3859

.88 = .8106 = 1 - .8106

1.67 = .9525 = 1 - .9525

4. The order quantity to meet 70% demand is found by solving P(X < M) = 0.70

Z = X - µ/ σ

X = µ + Zσ

P(Z < (M-20000)/5102 ) = 0.70

(M-20000)/5102 = 0.52

Q = X = 20000 + (.52)(5102) = 20000 + 2653 = 22,653

The projected profit of the three scenarios at a quantity order of 22, 653 units are:

Unit Sales Total Cost @ $16 Sales @ $24 per Surplus inventory Profit
per unit unit @ $5 per unit

Q = 22653

10000 362,448 240000 63,265 59183

(10000)(24) (22653-10000)(5) (240000 +

63265)-362448

20000 362,448 480000 13,265 130817

(20000)(24) (22653-20000)(5) (480000 +

13265)- 362448

22653 362,448 543,672 0 181224

(22653)(24) (22653-22653)(5) 543672 - 362448