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 to help make an 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.

- Compute the projected profit for the order quantities suggested by the management

team under three scenarios: worst case in which sales = 10,000 units, most likely

case in which sales = 20,000 units, and best case in which sales = 30,000 units.

- 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?