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in preparing for the upcoming holiday season, fresh toy company (ftc) designed a new doll called the dougie that teaches children how to dance. the fixed cost to produce the doll is $100,000. the variable cost, which includes material, labor, and shipping costs, is $34 per doll. during the holiday selling season, ftc will sell the dolls for $42 each. if ftc overproduces the dolls, the excess dolls will be sold in january through a distributor who has agreed to pay ftc $10 per doll. demand for new toys during the holiday selling season is uncertain. the normal probability distribution with an average of 60,000 dolls and a standard deviation of 15,000 is assumed to be a good description of the demand. ftc has tentatively decided to produce 60,000 units (the same as average demand), but it wants to conduct an analysis regarding this production quantity before finalizing the decision. (a) create a what-if spreadsheet model using formulas that relate the values of production quantity, demand, sales, revenue from sales, amount of surplus, revenue from sales of surplus, total cost, and net profit. what is the profit when demand is equal to its average (60,000 units)? $ (b) modeling demand as a normal random variable with a mean of 60,000 and a standard deviation of 15,000, simulate the sales of the dougie doll using a production quantity of 60,000 units. what is the estimate of the average profit associated with the production quantity of 60,000 dolls? round your answer to the nearest dollar.

User Horane
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1 Answer

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a) The what-if spreadsheet model is as follows:

Production Quantity: 60,000 units
Demand: Average of 60,000 units, Standard Deviation of 15,000 units
Fixed Cost: $100,000
Variable Cost: $34 per unit
Selling Price: $42 per unit
Surplus Selling Price: $10 per unit

Formula for Sales: =MIN(Demand, Production Quantity) * Selling Price
Formula for Surplus Sales: =MAX(0, Demand - Production Quantity) * Surplus Selling Price
Formula for Total Cost: =Fixed Cost + Variable Cost * Production Quantity
Formula for Net Profit: =Sales + Surplus Sales - Total Cost

When demand is equal to its average (60,000 units), the profit is $432,000.

b) After running a simulation with a production quantity of 60,000 units and demand modeled as a normal random variable with a mean of 60,000 and a standard deviation of 15,000, the estimated average profit associated with the production quantity of 60,000 dolls is $276,000.
User James Murphy
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