Electronics Products Available
2009
Quantitative Analysis help needed. determine the total cost in the following situations:?
The manager of a nearby electronics store, Great Purchase, sells lots of really cool electronic equipment. It is important that the store have plenty of products on hand in order to satisfy impulse purchases. However, excess inventory can eat into profit. It is a tough position to straddle. On average, the store sees sales of a particular hand-held computer of 100 units a month. 95% of the monthly demand ranges from 60 to 140 units. For every extra unit in inventory that is not needed in a month costs the store $25 in lost interest. But, for every unit not available to sell costs the store $40 in lost profit in a month. Your task: determine the total cost in the following situations:
1) Having exactly 100 units on hand every month;
2) Having a policy of meeting 90% of monthly customer demand on hand;
3) Having a policy of meeting only 40% of monthly customer demand on hand.
Please explain how you solved each.
One has to make some assumptions here and I have to say that I've never encountered a problem worded quite this way in any of the economics classes I took during college (I have my bachelor's degree in economics).
Well, the marginal cost is $25 and the opportunity cost, which is the gross financial profit, is $40. The marginal revenue is $40 of profit + $25 of cost or $65. I'm assuming a perfectly competitive market with normal price elasticity of demand and that all costs are accounted for (i.e. financial profit = economic profit). Also, in answering these question, I'll assume everything else is held equal.
The best I can say is that 1) 100 units * $25 (assuming that's the cost of each unit: the problem says it's interest and gives no cost) is $2,500 of cost, ceteris paribus.
2) One can assume from the fact that "on average, the store sees sales of...100 units," that the average demand is 100 units. Therefore, 90% of customer demand would be 90 units * $25 or $2250. The demand ranges from 60 to 140, however, accounting for approximately 3 standard deviations so the cost could be from $1350 (60 * 0.9 * $25) to $3150 (140 * 0.9 * $25) resulting in from $2160 to $5040 in profits (again, all else equal).
3) This policy is really a strange one because it is not profit maximizing which is not the typical behavior of a perfectly competitive firm. However, using the same forumla above, one can assume an approximate cost of $600 to $1400 with an average of $1000 and profits ranging from $960 to $2240.
That's the best I can do the problem. I might be wrong but I'm looking at it from an economics (and not an accounting) standpoint while making some assumptions. I hope this helps a little! Good luck!
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