By Group-2

Specialty Toys- Specialty Toys, Inc. sells a variety of new and

innovative childrens toys.
Management learned that the preholiday season is the best time
to introduce a new toy, because for December holiday gifts. .
Specialty plans to introduce a new product called Weather
Teddy.
When a child presses Teddys hand, the bear begins to talk. A
built-in barometer selects one of five responses that predict the
weather conditions. The responses range from
It looks to be a very nice day! Have fun
I think it may rain today. Dont forget your umbrella.
Tests with the product show that, even though it is not a perfect
weather predictor, its predictions are surprisingly good
 Recommended to order quantities= 15000 , 18000 , 24000,
28000
Sale price = $24/unit
Cost = $16/unit
surplus inventories price= $5/unit.
Specialtys senior 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.
1. Use the sales forecasters 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.

Let X be the demand for the toy.

Then X follows normal distribution with mean
=20000
standard deviation = = 5102.040816 .
Then P(10000 < X < 30000) = 0.95
(0.025 =Down area of curve)
From tables of areas under the standard normal curve
z=(30000-20000)/ = 1.96
= (30000-20000)/1.96 =10000/1.96 = 5102.040816
1) The demand distribution can be approximated by a normal distribution with mean = 20000
and standard deviation = 5102.

demand
0.00009

0.00008

0.00007

0.00006

0.00005
demand
0.00004

0.00003

0.00002

0.00001

0
0 10000 20000 30000 40000 50000 60000
2. Compute the probability of a stock-out for the
order quantities suggested by members of the
management team

Order (K) (K-20000)/5102 P(T > X)

15000
-0.98001 0.836458876
18000
-0.392 0.652472052
24000
0.784006 0.216518215
28000
1.568013 0.058439102
3. Compute the projected profit for the order quantities
suggested by the management team under three scenarios:
worst case in which sales = 10000 units, most likely case in
which sales=20000 units and best case in which sales=30000
units
The projected profit for the different order quantities and scenarios
are given in the following table.
Order Scenario 10000 Scenario 20000 Scenario 30000

15000 8*10000-11*5000 =25000 8*15000=120000 8*15000 = 120000

18000 8*10000-11*8000 8*18000 = 144000 8*18000 = 144000

= -8000

24000 8*10000-11*14000 8*20000-11*4000 8*24000 = 192000

= -74000 =116000

28000 8*10000-11*18000 8*2000-11*8000 8*28000 = 224000

= -118000 =72000
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?

The order quantity to meet 70% demand is found by

solving
Z= P(X < K) =0.70
P(Z < (K-20000)/5102 ) = 0.70
(K-20000)/5102 = 0.5244
K = 20000 + 5102 * 0.5244 = 20000 + 2675 = 22675.5
Cost =16
Price = 24
Surplus =5
 expected sales surplus cost profit

worst 10000 240000 63377.5 362808 -59430.5

most
likely 20000 480000 13377.5 362808 130569.5

best 30000 720000 0 362808 357192

Thank You