Specialty Toys, Inc., sells a variety of new and innovative childrens toys. Management

learned that the preholiday season is the best time to introduce a new toy, because many

families use this time to look for new ideas for December holiday gifts. When Specialty

discovers a new toy with good market potential, it chooses an October market entry date.

In order to get 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 high levels and large profits can be realized. However, 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 anticipated 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. A built-in barometer selects 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 many local television weather forecasters.

As with other products, Specialty faces the decision of how many Weather Teddy

units to order for the coming holiday season. Members of the management team suggested

order

quantities of 15,000, 18,000, 24,000, or 28,000 units. The wide range of order

quantities suggested indicates considerable disagreement concerning the market potential.

The product management team asks you for an analysis of the stock-out probabilities

for various order

quantities, an estimate of the profit potential, and for help with makingan order quantity recommendation. Specialty expects to sell Weather Teddy for $24 based on a cost of $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 .95 probability that demand would be between 10,000 units and 30,000 units. Managerial Report Prepare a managerial report that addresses the following issues and recommends an order quantity for the Weather Teddy product. 1. Use the sales forecasters prediction to describe a normal probability distribution that can be used to approximate the demand distribution. Sketch the distribution and show its mean and standard deviation. 2. Compute the probability of a stock-out for the order quantities suggested by members of the management team. 3. Compute the projected profit for the order quantities suggested by the management team under three scenarios: worst case in which sales 5 10,000 units, most likely case in which sales 5 20,000 units, and best case in which sales 5 30,000 units. 4. One of Specialtys managers felt that the profit potential was so great that the order quantity should have a 70% chance of meeting demand and only a 30% chance of any stock-outs. What quantity would be ordered under this policy, and what is the projected profit under the three sales scenarios? 5. Provide your own recommendation for an order quantity and note the associated profit projections. Provide a rationale for your recommendation.