Question

Champion manufactures winter fleece jackets for sale in the United States. Demand for jackets during the season is normally distributed, with a mean of 20,000 and a standard deviation of 10,000. Each jacket sells for $60 and costs $30 to produce. Any leftover jackets at the end of the season are sold for $25 at the year-end clearance sale. Holding jackets until the year-end sale adds another $5 to their cost. A recent recruit has suggested shipping leftover jackets to South America for sale in the winter there rather than running a clearance. Each jacket will fetch a price of $35 in South America, and all jackets sent there are likely to sell. Shipping costs add additional $5 to the cost of any jacket sold in South America, along with the $5 for holding jackets till the end of the season.
Required:
a. Would you recommend the South American option? Support your decision with calculations.
b. How will the South American option affect production and profitability at Champion?
c. On average, how many jackets will Champion ship to South America each season? (Note: you have already calculated this value in order to get the expected profit for the South American option.

Answer 1

Answer:

a. South American generates higher service level.

b. The profitability is higher in South American Option.

c. 19,269 jackets

Explanation:

Particulars : Current Policy ; South American Option

Anticipate demand : 20,000 ; 20,000

Standard deviation : 10,000 ; 10,000

Unit costs : $30 ; $30

Sales price : $60 ; $60

Disposal value : $25 ; $30

Inventory holding cost : $5 ; $5

South America Sales Price : 0  ; $35  

Shipping Costs : 0 ; $5

Salvage Value : $20 ; $25

Cost of under stock : $30 ; $30

Cost of overstock : $10 ; $5

Optimal cycle service level : 0.7500 ; 0.8571

Optimal production size : 26,745 ; 30,676

Expected profits : $472,889 ; $521,024

Expected Overstock 8,236 , 11,407