In: Accounting
(All answers were generated using 1,000 trials and native Excel functionality.) In preparing for the upcoming holiday season, Fresh Toy Company (FTC) designed a new doll called The Dougie that teaches children how to dance. The fixed cost to produce the doll is $100,000. The variable cost, which includes material, labor, and shipping costs, is $34 per doll. During the holiday selling season, FTC will sell the dolls for $42 each. If FTC overproduces the dolls, the excess dolls will be sold in January through a distributor who has agreed to pay FTC $10 per doll. Demand for new toys during the holiday selling season is uncertain. The normal probability distribution with an average of 60,000 dolls and a standard deviation of 15,000 is assumed to be a good description of the demand. FTC has tentatively decided to produce 60,000 units (the same as average demand), but it wants to conduct an analysis regarding this production quantity before finalizing the decision.
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Partially Correct
FC = Fixed Cost | $100,000 |
SP1 = Sales Price (during holiday season) | $42 |
VC = Variable Cost | $ 34 |
SP2 = Sales Price (in January – off season ) | $10 per doll |
Average demand | 60000 toy |
Standard Deviation | 15000 |
Calculated Production forecast = ?
Average Profit:
Profit standard Deviation:
Maximum Profit:
Profit = Sales – (Variable Cost + Fixed Cost)
During the holiday season,
For 40,000 dolls, sales = 40,000 * 42 = $1,680,000
profit = $1,680,000 – (VC+FC)
VC = 34*40,000 = 1,360,000
FC = Fixed Cost = $100,000
TC = Total Cost = VC + FC = 1,360,000+100,000 = $1,460,000
profit = 1,680,000 – 1,460,000 = $220,000
Maximum Profit = $220,000
Average Profit:
Off season sale price * Demand = $10*40,000 = $400,000
average sales = ($400,000 + 1,680,000 ) / 2 = $1,040,000
Average profit = 1,040,000 – 73,000 = $967,000
Probability of a loss:
Probability = 1 - F(Z)
where F(Z) = (Qty – Miu / SD)
F(Z) = 60,000 - 40,000 / 15,000 = 1.33
Absolute value of (1 – F(Z)) = 0.33
Hence probability of loss = 0.33 = 1/3
Possibility of a Shortage = 1 – Probability of loss = 1 – 1/3 = 2/3