Reference no: EM133592097

Case Study: Auvergne Jouets (AJ) is a French manufacturer of upscale toys made from natural, sustainably sourced materials. Toy Deluxe, one of their client retailers, operates small boutique stores located in trendy and affluent locations. While the selling season (Christmas) is relatively short, AJ has long manufacturing leadtimes and so Toy Deluxe can only receive one delivery of their toys before each season.

Question 1: Consider the new toy "Noe's Ark" (painted wooden boat with animal figurines) being introduced for the next season. Toy Deluxe's UK buyer purchases this toy from AJ for £90 and sells it to customers at a retail price of £130. AJ's production and shipping costs per unit are £40. At the end of the season, Toy Deluxe generally needs to offer deep discounts to sell remaining inventory. When it comes to "Noe's Ark", Toy Deluxe estimates that it will only be able to recover £70 from each unsold unit.

Toy Deluxe's UK buyer estimates that total demand for Noe's Ark is normally distributed with mean 300 and standard deviation 110.

Part 1: Wholesale price contract

1) What is Toy Deluxe's optimal order quantity from AJ for the UK?

2) What is Toy Deluxe's profit?

3) What is AJ's profit in relation to their sale of "Noe's Ark" to Toy Deluxe UK?

Question 2: Buy-back contract

As part of their new introduction strategy, AJ is now offering to buy back from Toy Deluxe UK any unsold "Noe's Ark" toys for £78 at the end of the season. As part of this arrangement Toy Deluxe is responsible for paying the shipping cost to send the toys back to AJ, which are estimated at £1 per unit. AJ also estimates that it can obtain on its side a salvage value of £70 per unit for the returned toys.

4) What is Toy Deluxe's new order quantity?

5) What is Toy Deluxe's new profit?

6) What is AJ's new profit? Provide a qualitative explanation for the differences in profit between the two firms and two relationship types observed from your calculations in this exercise.