Question

Problem 12-11

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.

1. Create a what-if spreadsheet model using a formula 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)?
   
   $  
   

2. 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? Round your answer to the nearest dollar.
   
   $  
   
   How does this compare to the profit corresponding to the average demand (as computed in part (a))?
   
   Average profit is   the profit corresponding to average demand.
   

3. 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? Round your answers to the nearest dollar.
   
   50,000-unit production quantity: $  
   
   70,000-unit production quantity: $  
   

4. In addition to mean profit, what other factors should FTC consider in determining a production quantity?
   
   The input in the box below will not be graded, but may be reviewed and considered by your instructor.
   
   
   
   Compare the three production quantities (50,000, 60,000, and 70,000) using all these factors. What trade-off occurs for the probability that a shortage occurs? Round your answers to 3 decimal places.
   
   50,000 units:
   
   60,000 units:
   
   70,000 units:
   
   What is your recommendation?
   
   The input in the box below will not be graded, but may be reviewed and considered by your instructor.
   

Answer 1

a)

EXCEL FORMULA:

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b)

Simulation model is as follows:

EXCEL FORMULA:

NOTE: Rows 6 to 995 of the simulation table are hidden to fit it one screen

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c)

Using the simulation model, change the production quantity in cell E11 and note down Average net profit

Mean profit associated with:

50,000 -unit production quantity = $ 236,928

70,000 -unit production quantity = $ 87,503

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d)

The trade-off occurs between probability of shortage and probability of loss

These parameters are evaluated as below for the three production quantities as below

Production quantity	Probability of shortage	Probability of loss
50,000	0.73	0.102
60,000	0.51	0.225
70,000	0.25	0.402

Considering the mean profit, and trade-offs, viz. probability of shortage, probability of loss

we recommend the production quantity of 50,000 units