QUESTION # 2 50 MARKS Forever Young is a retailer of trendy and low-cost apparel in the United States. The company divides the year into four sales seasons of about three months each and brings in new merchandise for each season. The company has historically outsourced production to China, given the lower costs there. Sourcing from the Chinese supplier costs 55 yuan/unit (inclusive of all delivery costs), which at the current exchange rate of 6.5 created with pdfFactory Pro trial version www.pdffactory.com yuan/s gives a variable cost of under $8.50/unit. The Chinese supplier, however, has a long lead time, forcing Forever Young to pick an order size well before the start of the season. This does not leave the company any flexibility if actual demand differs from the order size. The production quantities for the Chinese supplier for Period 1 and 2 are 1,150 units and 950 units respectively. A local supplier has come to management with a proposal to supply product at a cost of $ 10/unit but to do so quickly enough that Forever Young will be able to make supply in the season exactly match demand. Management is concerned about the higher variable cost but finds the flexibility of the onshore supplier very attractive. The challenge is to value the responsiveness provided by the local supplier. Uncertainties Faced by Forever Young To better compare the two suppliers, management identifies demand and exchange rates as the two major uncertainties faced by the company. Over each of the next two periods (assume them to be a year each). demand may go up by 10 percent, with a probability of 0.5, or down by 10 percent, with a probability of 0.5. Demand in the current period was 1,000 units. Similarly, over each of the next two periods, the yuan may strengthen by 5 percent, with a probability of 0.5, or weaken by 5 percent, with a probability of 0.5. The exchange rate in the current period was 6.5 yuan/s. The sales price is $20/unit QUESTION # 2 50 MARKS Forever Young is a retailer of trendy and low-cost apparel in the United States. The company divides the year into four sales seasons of about three months each and brings in new merchandise for each season. The company has historically outsourced production to China, given the lower costs there. Sourcing from the Chinese supplier costs 55 yuan/unit (inclusive of all delivery costs), which at the current exchange rate of 6.5 created with pdfFactory Pro trial version www.pdffactory.com yuan/s gives a variable cost of under $8.50/unit. The Chinese supplier, however, has a long lead time, forcing Forever Young to pick an order size well before the start of the season. This does not leave the company any flexibility if actual demand differs from the order size. The production quantities for the Chinese supplier for Period 1 and 2 are 1,150 units and 950 units respectively. A local supplier has come to management with a proposal to supply product at a cost of $ 10/unit but to do so quickly enough that Forever Young will be able to make supply in the season exactly match demand. Management is concerned about the higher variable cost but finds the flexibility of the onshore supplier very attractive. The challenge is to value the responsiveness provided by the local supplier. Uncertainties Faced by Forever Young To better compare the two suppliers, management identifies demand and exchange rates as the two major uncertainties faced by the company. Over each of the next two periods (assume them to be a year each). demand may go up by 10 percent, with a probability of 0.5, or down by 10 percent, with a probability of 0.5. Demand in the current period was 1,000 units. Similarly, over each of the next two periods, the yuan may strengthen by 5 percent, with a probability of 0.5, or weaken by 5 percent, with a probability of 0.5. The exchange rate in the current period was 6.5 yuan/s. The sales price is $20/unit
