Question
A producer sells a certain type of LED light to LPS, a local hardware store, at $12 each. The marginal production cost for the producer
A producer sells a certain type of LED light to LPS, a local hardware store, at $12 each. The marginal production cost for the producer is $1 per item. LPS prices the lights at $24 and expects demand to be normally distributed with a mean of 20,000 and a standard deviation of 5,000. LPS places a single order with the producer. Currently, LPS discounts any unsold lights at the end of two months down to $3, and any lights that did not sell at full price sell at this price.
How many lights should LPS order? What is LPS's expected profit? How many lights does LPS expect to sell at a discount? What is the expected understock? What is the producer's expected profit? What is the supply chain's profit?
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