SPECIALITY TOYS

Case study
Assignment 2
Introduction to business statistics
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.

Solution:
Specialty’s senior
sales forecaster predicted an expected demand of 20,000 units with a .95
probability
that demand would be between 10,000 units and 30,000 units.

Mean=20,000 (expected demand of 20000 )

Probability P=0.95
Value of z for probability 0.95 based on symmetry of normal distribution curve as
shown below is 0.95/2= 0.475 is 1.96
Normal probability distribution function

Z=x-µ/σ
1.96=30000-20000/ σ
σ (deviation)=5102.
Normal Distribution curve

speciality toy rough

sheet.xlsx
2. Compute the probability of a stock-out for the order quantities suggested by members
of the management team.

suggested
quantity 15000
18000
24000
28000
Expected demand=20000
Mean=20000
Standard deviation=5102 unit

Z=order- p(order p(out of

order 20000/5102 quantity) stock>order)
15000 -0.98000784 0.1635 0.8365
18000 -0.392003136 0.3483 0.6517
24000 0.784006272 0.7823 0.2177
28000 1.568012544 0.9416 0.0584

Based on above observation of probability of order out of stock we can deduce that
As quantity of order increases chances of stock getting out of stock gets lower.
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.

Solution:

Cost price=$16
Selling price=$24
Profit normal=24-16=8
Profit for surplus inventory=16-5=-11 i.e loss of $11

order worst case scene(10000) most probable(20000) best case(30000)

15000 8*10000-11*5000=25000 8*15000=120000 8*15000=120000
18000 8*10000-11*8000=-8000 8*18000=144000 8*18000=144000
8*10000-11*14000=- 8*20000-
24000 74000 11*4000=116000 8*24000=192000
8*10000-11*18000=- 8*20000-
28000 118000 11*8000=72000 8*28000=224000

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 a 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?
Solution:

Z value for 70% chance when demand met is 0.7580.

(oq-20000)/5102 = 0.7580.

oq = 20000 + 5102 * 0.7580 = 20000 + 3867

oq= 23867 units to be ordered.

Hence ordered quantity when 70 percent demand is met is 23867.

order worst case scene(10000) most probable(20000) best case(30000)

8*10000-11*13867=- 8*20000-
23867 72537 11*3867=117463 8*23867=190936

For worst case scene of 10000 there will be loss of 72537.

For most probable scene of 20000 there will be profit of 117463.

For best case scene of 30000 there will be profit of 190936.

Q.Provide your own recommendation for an order quantity and note the associated
profit projections. Provide a rationale for your recommendation

solution:
Z=order- p(order p(out of
order 20000/5102 quantity) stock>order)
15000 -0.98000784 0.1635 0.8365
18000 -0.392003136 0.3483 0.6517
24000 0.784006272 0.7823 0.2177
 28000 1.568012544 0.9416 0.0584

Based on above observation of probability of order out of stock we can deduce that
As quantity of order increases chances of stock getting out of stock gets lower.

order worst case scene(10000) most probable(20000) best case(30000)

15000 8*10000-11*5000=25000 8*15000=120000 8*15000=120000
18000 8*10000-11*8000=-8000 8*18000=144000 8*18000=144000
8*10000-11*14000=- 8*20000-
24000 74000 11*4000=116000 8*24000=192000
8*10000-11*18000=- 8*20000-
28000 118000 11*8000=72000 8*28000=224000

Based on above analysis we can say that probability of stock getting out of stock is
lower at 24000 .
Also at 20000 profit is maximum and it decreases to 72000 with stock increasing
to 28000.
Hence stock should be nearer to 20000 and around 24000 for best profitability.