Reference no: EM13225824
Tom owns an independent bookstore located in Philadelphia. Tom has to decide on the best order quantity for a new self-help book that is to be released soon. The books will each cost Tom $20 but will retail for $30. At the end of the season, Tom can dispose of all the unsold copies of the book at $5 each. Tom estimates that demand can be represented by a normal distribution with mean of 240 and a standard deviation of 100. The publisher's cost per book is $7.
- a) What order quantity maximizes Tom's expected profit?
- b) What is Tom's expected profit?
- c) What is the resulting profit for the publisher?
Now consider the supply chain to be a single (vertically-integrated) entity.
- d) What quantity will maximize the supply chain's profit?
- e) How much is the total supply chain profit?
The publisher is proposing a buy-back arrangement : at the end of the season, they will buy back all unsold copies at $15.00. However, Tom is responsible for shipping unsold copies back to the publisher at $1 per book.
- f) What quantity should Tom order if he wishes to maximize his expected profit?
- g) What is the resulting profit for the publisher?
- h) What is the total profit for the supply chain?
Consider the question of the best buy-back price.
- i) Compute the best buy-back price.
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