To analyze the manager's proposal for inventory and stock-outs, the Authentic Chinese Pizza company needs to determine its profit-maximizing output. It can use demand forecasting and the demand and supply framework to estimate the optimal order quantity and project profits under various sales scenarios by assessing marginal revenues and costs.
- To evaluate the manager's proposed policy of aiming for a 70% chance of meeting demand and a 30% chance of stock-outs, the order quantity and projected profits under different sales scenarios must be determined.
- As a monopolistic competitor, the Authentic Chinese Pizza company should first find the profit-maximizing level of output.
- The manager can utilize forecasting models to estimate sales and set an order quantity that will achieve the desired probabilities.
- For example, using historical data, statistical tools can predict the demand curve, which can be matched against the supply curve to find the equilibrium price and quantity.
- From there, applying the target probabilities, the manager can identify the optimal order quantity that will likely meet the 70% demand threshold.
- Once the order quantity is set, the company can project profits by considering the costs associated with different order sizes and the likelihood of each sales scenario.
- Moreover, the company must analyze its marginal revenues and marginal costs in order to make a decision that aligns with profit maximization objectives.