A Chocolate distributor sells the chocolate-based on made to order basis. They buy from a chocolate supplier who has set the purchase lot size of 1000 boxes and charge the distributor at $300 per box. The distributor sells the product at $420 per box. The salvage value is 100. The distributor forecasts the chocolate demand as follows:

2000 boxes @35%; 3000 boxes @20%; 4000 boxes @45%

For the supplier, the fixed production cost is $50,000 and the variable production cost is $100 per box. Distributor has estimated that its expected profit equals to $240,000 if order quantity is 2000 boxes and $248,000 if order quantity is 3000 boxes.

Calculate and answer the distributor’s profit and expected profit in Table form.

1. 1. Determine the expected profit if the order quantity is at 4000 boxes. List out the calculation formula as well.
2. 2. What is the option to be taken, and what will be the maximum profit for the Distributor?

To encourage the distributor to place a larger order, the supplier now plans to offer the distributor a buy-back contract. They will buy unsold chocolates at $240 per box while they can salvage at $200 per box through some secret channel

For the supplier, the fixed and variable costs are the same as before. The Distributor now has estimated that with this buy back contract their expected profit will become $240000 for 2000 boxes and $297000 for 3000 boxes.     

3. Determine the expected profit if the order quantity is at 4000 boxes. List out the calculation formula as well.

4. What is the option to be taken, and what will be the maximum profit for the Distributor?

 
 

Sell Price Transfer Price Salvage Valuee Distributor (420-300) =120 420 100 4 Fixed Cost Variable Cost Supplier 50000 100 Sales Unit 2000 3000 4000 Average Sales Probability 35% 20% 45% 3000 Order Qty 2000 2000 2000 Expected Profit Profit Order Qty 3000 3000 3000 Profit Order Qty 4000 4000 4000 Profit