Specialty Toys Inc. sells a variety of new and innovative children’s toys. Management learned that the
preholiday season is the best time to introduce a new toy, because many families use this time to look for new
ideas for December holiday gifts. When Specialty discovers a new toy with good market potential, it chooses an
October market entry date.
In order to get toys in its stores by October, Specialty places one-time orders with its manufacturers
in June or July of each year. Demand for children’s toys can be highly volatile. If a new toy catches on, a
sense of shortage in the market place often increases the demand to higher levels and large profits can be
realized. However, new toys can also flop, leaving Specialty stuck with high levels of inventory that must be
sold at reduced prices. The most important question the company faces is deciding how many units of a new toy
should be purchased to meet anticipated sales demand. If too few are purchased, sales will be lost; if too
many are purchased, profits will be reduced because of low prices realized in clearance sales.
For the coming season, Specialty plans to introduce a new product called Weather Teddy. This variation
of a talking teddy bear is made by a company in Taiwan. When a child presses Teddy’s 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” to “I think it may rain today. Don’t forget your
umbrella”. Tests with the product show that, even though it is not a perfect weather predictor, its
predictions are surprisingly good. Several Specialty’s managers claimed Teddy gave predictions of the weather
that were as good as many local television weather forecasters.
As with other products, Specialty faces the decision of how many Weather Teddy units to order for the
coming holiday season. Members of the management team suggested order quantities of 15,000, 18,000, 24,000, or
28,000 units. The wide range of order quantities suggested indicates considerable disagreement concerning the
market potential. The product management team asks you for an analysis of the stock-out probabilities for
various order quantities, an estimate of the profit potential, and to help make an order quantity
recommendation. Specialty expects to sell Weather Teddy for $24 based on a cost of $16 per unit. If inventory
remains after the holiday season, Specialty will sell all surplus inventory for $5 per unit. After reviewing
the sales history of similar products, Specialty’s senior sales forecaster predicted an expected demand of
20,000 units with a 0.95 probability that demand would be between 10,000 units and 30,000 units.
Prepare a managerial report that addresses the following issues and recommends an order quantity for the
Weather Teddy product.
1. Use the sales forecaster’s 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.
2. Compute the probability of a stock-out for the order quantities suggested by members of the management
3. Compute the projected profit for the order quantities suggested by the management team under three
scenarios: worst case in which sales = 10,000 units, most likely case in which sales = 20,000 units,and best
case in which sales = 30,000 units.
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 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?
5. Provide your own recommendation for an order quantity and note the associated profit projections.
Provide a rationale for your recommendation (max one page).
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