Tsanta is a small company started on Kickstarter two years ago and based in Austria. Its first product, an electronic watch with an E-ink display turned out to be very successful and won lots of awards. Most of company's sales are concentrated around Christmas time and estimated to follow the Normal distribution with mean customer demand 20,000 and sigma 5,000.

Tsanta has established a strong connection with Chinese manufacturers, who charge 21EUR for each watch produced. Typically, it takes three months to ship the finished watches to Tsanta. Finally, Tsanta's watches are sold for 199EUR in Austria.

3(a) Explain whether we can apply the newsvendor model to the information provided above and decide on the optimal amount of Tsanta watches to order from China before Christmas. (5 marks)

3(b) Apply the newsvendor model to find the optimal number of watches of Tsanta to order from China before Christmas. (10 marks)

To improve operational efficiency, in addition to the China orders, Tsanta decides to produce watches also locally by using Austrian manufacturers. Local production costs 35 EUR and are fast enough to satisfy all unmet demand if needed.

3(c) Given the option to produce in Austria, explain intuitively in words your calculations for the cost of overage and underage. Apply the newsvendor model under this setting to find the optimal number of watches to order from China before Christmas. (10 marks)