Question

10. A retailer and a toy manufacturer have signed a revenue-sharing contract for a kind of toy. Each toy costs the toy manufacturer $14 to produce. The toy will be sold to the retailer for $16. The retailer in turn prices a toy at $32 and forecasts demand to be normally distributed, with a mean of 5000 but the standard deviation still unknown. All unsold toys are discounted to $8, and then sold at this price. The retailer will share 25 percent of the revenue (obtained from sales at the regular price, but not sales at the discounted price) to the toy manufacturer, and keep 75 percent for itself.

    1. A) How many toys should the retailer order with this revenue-sharing contract? (10 points)

    2. B) In order to maximize the total profit of the toy manufacturer and the retailer, can you

       design a new revenue-sharing contract such that the total profit is maximized and at the same time, the retailer is actually selling to the toy manufacturer with a wholesale price less than the manufacturing cost? (14 points)

Answer 1

According to the given question, under the Revenue sharing contract between the manufacturer and the retailer, retailer get toy each at the rate of $16 and sells at $32 and all unsold toys are sold at a discount of $8 that means purchased at $16 but sold at $24

according to the contract on the sale of $32 per toy retailer had to share 25% of revenue which is $8 he had to give to manufacturer

and all on unsold he had to give nothing which means on both sale he earns $8 per toy so whatever the quantity he demand doesnot effect his profits.

Answer a)

So he can ask for any quantity , basically the one which is demanded he should prefer for that number of quantity to be demanded.

Answer b)

according to the mention contract, here we can change few policies , beginning the contract fron initial and adding few more contracts as per the demand of industry

contracts can coordinate with a supply chain when the product has a fixed price in which we can include buy-back, quantity-flexibility, and sales-rebate. With a buy-back contract, the manufacturer agrees to buy back unsold stock at a price lower than the original price( lets say $15). Quantity-flexible contracts require the manufacturer to provide the retailer a full refund up to a certain quantity; and with sales-rebate contracts the manufacturer gives the retailer a rebate for exceeding a certain number of sales. With a fixed retail price, buy-backs and revenue sharing generate the same cash flow no matter what the demand is. And revenue sharing (as well as price discounts) allows coordination of a supply chain when the retailer fixes the price of a product, which buy-back contracts do not.And in this we can add revenue sharing on the unsold if they are sold at the discounted price then also sharing should be there but that now will not be 25% but reduced to 12% due to discount this will make manufacturer to earn more and also retailer will face less lose when toys are unsold and to be given back to the manufacturer. Also, after the mean quantity demanded exceeds than some offers from the manufacturer to the retailer should be offered as incentive as reward.