In March 2008, Danny Keepstone, marketing manager of Wellyntoy Products, was trying to decide how many Dynatrons he should request the manufacturing plant to produce for the 2008 autumn season. The Dynatron was a novelty toy first introduced on the back of a TV series for children in the autumn of 2007. Because of production problems and the difficulty of predicting demand, the factory had produced more Dynatrons than were eventually sold. With a new series of Dynatron adventures scheduled for Autumn showing on TV in 2008 and the possibility of a feature film, Danny Keepstone was anxious to avoid the same situation occurring this year. The Dynatron The idea for the Dynatron toy originated from a children's' comic strip. Dynatron was a robot with somewhat human qualities whose adventures had proved popular with boys in the 7 to 12 years age range. Dynatron's success had led to the development of a series of 'cartoon-type' films for children's television. Wellyntoy had been quick to spot the potential of a character toy based on the Dynatron in 2006 before the TV series was announced. In September 2006, they had bought the rights to design a toy and use the Dynatron name from the originator of the character. The contract involved a lump sum payment and a royalty that was based on Wellyntoy's gross sales of the product. The royalty was not to become effective however, until a set number of Dynatrons had been sold. Early in 2007, Wellyntoy's product designers set to work to produce an appropriate Dynatron toy for boys. The result was an injection moulded toy robot with moving parts. With a few manipulations, it could be converted into a modernistic racing car, in keeping with the original Dynatron character. The plan was to produce two types of Dynatron, the standard and the super, the main difference being the size and finish. While the design details of the Dynatron were being settled, the marketing manager, Danny Keepstone, had been attempting to determine the size of the potential market and to decide upon channels of distribution. The announcement of the Dynatron TV series had meant bringing Dynatron to the market rather more speedily than had been originally planned. Keepstone had been showing a prototype Dynatron toy to distributors since the start of 2007 and had displayed the toy at the Harrogate Toy Fair in March. But so far, toy distributors had not displayed a great deal of interest. By the end of April 2007, Saul Gassman, the product manager had to decide how many units he would order from the factory. The Wellyntoy production manager insisted that if the units were to be produced in time for selling in conjunction with the Autumn TV series, he needed the firm annual

2 production requirements for the Dynatron by the end of April. With only a few firm orders for the toy, Keepstone and Gassman together decided to go ahead with the project and ordered 52,000 units from the factory for delivery during the 2007 Autumn season. 33,000 units were to be the standard Dynatron and 19,000 units the super. The tooling capable of producing up to 150,000 units was ordered at a cost of 50,000, and production scheduled to commence in early July. However, delays at the suppliers and problems with the newly installed tooling resulted in production not getting underway till September. Although supplies of Dynatron were dispatched to the distributors only four weeks behind schedule, because of the build-up of Christmas stock, insufficient numbers of the toy managed to get onto the shelves of the shops in time to coincide with peak demand. The total number of Dynatrons sold during the 2007 season only reached 35,000 units, the ratio between supers and standards being approximately 60:40. By February 2008 there were nearly 17,000 Dynatrons in inventory, consisting of 12,000 standards and 5,000 supers. The Production Decision Because of the difficulties and setbacks experienced in 2007, Keepstone and Gassman were anxious to ensure that the plans for 2008 were firmly based on what had already been learned. With a further Dynatron TV series planned for Autumn 2008, they decided to concentrate on careful distribution and promotion for 2008 sales. Market research indicated that demand for Dynatron should be in excess of the 2007 predictions. Although both men were convinced that the immediate prospects for the Dynatron were excellent, they were uncertain as to the actual market demand for the coming year and as to the share of this market that would be taken by the super Dynatron. They were certain however, that in order to maximise the overall profitability of the product they would have to estimate the size of the production order in a careful and systematic manner. The factory order for the 2008 production run had to be with the production manager by the end of March. As a first step, Gassman decided to review the new cost estimates for the two Dynatron models. The production department advised him that the existing tooling, which had been purchased at a cost of 50,000, was in good shape and would be capable of producing a total of 150,000 units/year in any mix of models. To produce anywhere between 150,000 and 200,000 units would require an additional 15,000 of tooling. To increase the production above 200,000 units would require yet another 55,000 in addition to the extra 15,000 already mentioned. This latter step up in tooling would allow the factory to produce up to 500,000 Dynatrons a year. In calculating costs, Gassman planned to completely write off tooling costs during the year in which it was ordered. After consultation with the salesmen it had been decided to sell the Dynatrons in 2008 at an average price from the factory of 4.30 for the standard and 5.50 for the super. Wellyntoy's direct costs for these items were 2.50 and 3.20 respectively. In addition to direct costs Gassman estimated that 9% of the gross margin for both models would be required for selling expenses, royalties and discounts, while a further 3% would be allocated to advertising and promotion. In addition there would be a penalty for over-production in the form of a stock carrying cost that was charged at the rate of 2% per month based on Wellyntoy's direct costs. Gassman estimated that any excess stock could be considered as being carried for an average of 6 months.

3 Having outlined the costs involved, Gassman turned his attention to the question of demand. Although he was uncertain as to what figure he should choose, he believed that demand would expand extremely rapidly for one or two years and then tail off just as quickly. Because of the extreme uncertainty arising from these factors he determined to concentrate solely on the demand for the 2008 season. To help decide the demand, he called on Danny Keepstone and together they considered the possible sales figures for Dynatrons. They finally decided that the median demand was 150,000 units. They were certain that the demand would not be below 50,000 or above 300,000 units, and they believed that there was 1 chance in 4 that demand would be at least 190,000 units, and also 1 chance in 4 that the demand would be less than 125,000 units. In order to decide on the quantities to order from the factory, Danny Keepstone felt that they should estimate how this demand would be broken down between the super and standard Dynatrons. This was necessary because the factory had to order raw materials well in advance and he did not want to be left carrying standard Dynatrons in stock while the market was demanding supers, or vice-versa. Both Gassman and Keepstone believed that this breakdown on demand between models was independent of the over-all level of demand. They reasoned that the consumer would purchase either the standard or the super based entirely on the distinctive selling features of the two models. They felt that the super Dynatron would account for 40% of total demand, although it might rise to as high as 60% of demand. In no circumstances, they believed, would it fall below 30%. In addition, they considered there was a 75% chance that the share would be 45% or less, and a 25% chance that the supers would account for 36% or less of total demand. Production Alternatives Gassman now felt that he had all the information necessary to decide how many standard and super Dynatrons he should order. He had received the following suggestions from various people associated with the project: 1. Field sales representatives argued that the gross margins on both standard and super Dynatrons far outweighed the storage costs if some units were left unsold. They asked for 225,000 Dynatrons to be made, consisting of 130,000 standards and 95,000 supers. 2. The production manager advised a total production of 150,000 units split into 70,000 supers and 80,000 standards. He argued that until the Dynatron caught on, there was no point in incurring any additional tooling costs. 3. Gassman himself felt that each of the above suggestions had its merit. However, he favoured a production quantity of 200,000 units split into 85,000 supers and 115,000 standards. He felt that the cost of lost sales would more than offset the cost of additional tooling. To ensure that he made the correct decision, Gassman decided to analyse all three alternatives to decide which one represented the best course of action.

QUESTION: Among the three production alternatives which suggestion would you recommend? What are the pros and cons of each suggestion?