1. Betting on a New Product Revisited

CanadaLoon is deciding how many units to order of their new parka (The

Snowmaggedon II) for 2020 to be sold through Canadian specialty stores. They

expect to sell to the retailers 3000 units with a standard deviation of 900 units and

have assumed a normal distribution for the demand. The selling price to the

retailers is $450. The production cost is $280. Units that are not purchased in

Canada will be sold in South America during July where retailers will only pay $250

per unit. (40 points)

a) CanadaLoon quotes an in-stock probability of 90% when placing their optimal

order. At how much do they value the cost per unit of unsatisfied demand? Is this

equal to the margin made on each parka? Why? (15 points)

b) Given the quoted in-stock probability of 90%, what is the fill rate CanadaLoon

offers this parka? (5 points)

c) Given the quoted in-stock probability of 90%, what is the leftover inventory that

CanadaLoon should expect for this parka? (5 points)

d) Now suppose that the product will flop and demand will be zero with some

probability p. Alternatively, with probability (1-p) the product will succeed and

demand will be normally distributed with a mean of 3000 and standard deviation of

900 units. In this context, CanadaLoon orders 4035 units. What is the probability

that the product will flop? (15 points)

Hint: Remember that CanadaLoon quotes an in-stock probability of 90%.