TEC:-

Consider the relationship between TEC and ONeill with unlimited, but expensive, reactive capacity. Recall that TEC is willing to give O Neill a midseason replenishment (see Figure 1 2.1) but charges O'Neill a 20 percent premium above the regular wholesale price of $ 11 0 for those units. Suppose TEC's gross margin is 25 percent of its selling price for units produced in the first production run.

However, TEC estimates that its production cost per unit for the second production run (any units produced during the season after receiving O'Neils second order) is twice as large as units produced for the initial order. Wetsuits produced that O'Neill does not order need to be salvaged at the end of the season. With O'Neils permission, TEC estimates it can earn $30 per suit by selling the extra suits in Asian markets.

a. What is TEC's expected profit with the traditional arrangement (i .e., a single order by O'Neill well in advance of the selling season)? Recall that O'Neils optimal newsvendor quantity is 4, 101 units.

b. What is TEC's expected profit if it offers the reactive capacity to O'Neill and TEC's first production run equals O'Neills first production order?

Assume the demand forecast is normal ly distributed with mean 3, 1 92 and standard deviation 1,181. Recall, O'Neills optimal first order is 3,263 and O'Neills expected second order is 437 units.

c. What is TEC's optimal first production quantity if its CEO authorizes its production manager to choose a quantity that is greater than O'Neills first order?

d. Given the order chosen in part c, what is TEC's expected profit? (Warning: this is a hard question.)