Case Problem: Specialty Toys, Inc. Specialty Toys, Inc., sells a variety of new and innovative childrens toys and believes that the preholiday season is the best time to introduce a new toy. Many families use this time to look for new ideas for December holiday gifts. When Specialty has a new toy with good market potential, it chooses an October market entry date. To get the toys in its stores by October, Specialty places one-time orders with its manufacturers in June or July of each year. Demand for childrens toys can be highly volatile. If a new toy catches on, a sense of shortage in the marketplace often increases the demand to very high levels and large profits can be realized. On the other hand, new toys can also flop, leaving Specialty stuck with high levels of inventory that must be sold at reduced prices, The most important question the company faces is deciding how many units of a new toy should be purchased to meet expected sales demand. If too few are purchased, sales will be lost; if too many are purchased, profits will be reduced because of low prices realized in clearance sales. For the coming season, Specialty plans to introduce a new product called Weather Teddy. This variation of a talking teddy bear is made by a company in Taiwan. When a child presses Teddys hand, the bear begins to talk. With the aid of a built-in barometer, Teddy says one of five responses that predict the weather conditions. The responses range from It looks to be a very nice day! Have fun to I think it may rain today. Dont forget your umbrella. Tests with the product show that even though it is not a perfect weather predictor, its predictions are surprisingly good. Several of Specialtys managers claimed Teddy gave predictions of the weather that were as good as the local television weather forecasters. Specialty faces the decision of how many Weather Teddy units to order for the coming holiday season. Members of the management team recommended order quantities of 15,000, 18,000, 24,000, and 28,000. Considerable disagreement concerning the market potential is evidenced by the different order quantities suggested. The product management team has asked you for an analysis of the stock-out probabilities for various order quantities, an estimate of the profit potential, and help in making an order quantity recommendation. Specialty expects to sell Weather Teddy for 24, and the cost is 16 per unit. If inventory remains after the holiday season, Specialty will sell all surplus inventory for 5 per unit. After reviewing the sales history of similar products, Specialtys senior sales forecaster predicted an expected demand of 20,000 units with a 0.95 probability that demand would be between 10,000 units and 30,000 units.

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