Flanders of Springfield

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Flanders of Springfield
Question 1) Suppose that Flanders decides to price at $100 and order 1200 sweaters. 3a. What is the contribution if demand is 600 sweaters?

Revenue = (600*100)+(600*15)
Cost = (1200*35)
Profit = Contribution = Revenue – Cost

3b. What is the contribution if demand is 1,200 sweaters?

Revenue = (1200*100)
Cost = (1200*35)

3c. What is the contribution if demand is 2,400 sweaters?

Revenue = (1200*100)
Cost = (1200*35)
There is nothing that can be done if demand is over your inventory, it is sales Flanders was not able to make, but lost no money. 3d. What is the expected contribution?
(27000*.3) + (78000*.4) + (78000*.3)
8100 + 31200 + 23400 = $62,700
Question 2) For each possible inventory level that you would choose (i.e., 600, 1200 or 2400), calculate the expected contribution for that inventory decision. Assume price of $100

Question 3)
4b. Assuming that she wishes to maximize expected contribution, how many sweaters should Jacobson order?

She should order 1400 sweaters

Contribution was found by finding Revenue of sweaters sold up to 1380 sweaters, then subtracting cost of buying inventories. Also there was salvage value of leftover sweaters for all calculations above 1400 sweaters. 4c. What is the expected contribution of the order given in 4b? $89,300

4d. Suppose, Jacobson could obtain perfect information about the demand for sweaters. What is the most she should pay for this information? Expected maximum contribution = (39,000)(0.3) + (78,000)(0.4) + (156,000)(0.3) Expected maximum contribution = $89,700

With the value of the expected maximum contribution we can calculate the difference with the largest of the expected contributions ($89,300). This will give us a value of $400 which is the maximum she should pay for the information.
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