Question

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 extremely uncertain. Forecasts are for expected sales of 60,000 dolls with a standard deviation of 15,000. The normal probability distribution 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.

(a)

Create a what-if spreadsheet model using formulas that relate the values of production quantity, demand, sales, revenue from sales, amount of surplus, revenue from sales of surplus, total cost, and net profit. What is the profit corresponding to average demand (60,000 units)? (b) Modeling demand as a normal random variable with a mean of 60,000 and a standard deviation of 15,000, simulate the sales of The Dougie doll using a production quantity of 60,000 units. What is the estimate of the average profit associated with the production quantity of 60,000 dolls?

(c)

Before making a final decision on the production quantity, management wants an analysis of a more aggressive 70,000-unit production quantity and a more conservative 50,000-unit production quantity. Run your simulation with these two production quantities. What is the mean profit associated with each? (d) Besides mean profit, what other factors should FTC consider in determining a production quantity? Compare the four production quantities (40,000; 50,000; 60,000; and 70,000) using all these factors. What trade-offs occur? If required, round Probability of a Loss to three decimal places and Probability of a Shortage to two decimal places.

Answer 1

Part a:

Sales = minimum (production, Demand)

(if Demand > production, then Sales = production and if Demand < production, then sales = demand)

Sales of Surplus = Maximum (0, Production – Demand)

Revenue from sales = Sales x Selling price

Revenue for sales of surplus = Salvage value x Sales from surplus

Total cost = Fixed Cost + (Variable cost x production volume)

Net Profit = Revenue from sales + Revenue for sales of surplus - Total cost
Average profit for 60,000 units of production = $208,309

Part C:

Change the cell G2 to 70,000 and 40,000 and record the profit

Part D:

Change the cell G2 to given values and record the profit, probability of loss, probability of stockout.