( Land’s End ) Geoff Gullo owns a small firm that manufactures “Gullo Sunglasses.” He has the opportunity to sell a particular seasonal model to Land’s End. Geoff offers Land’s End two purchasing options:
• Option 1. Geoff offers to set his price at $65 and agrees to credit Land’s End $53 for each unit Land’s End returns to Geoff at the end of the season (because those units did not sell). Since styles change each year, there is essentially no value in the returned merchandise.
• Option 2. Geoff offers a price of $55 for each unit, but returns are no longer accepted. In this case, Land’s End throws out unsold units at the end of the season. T his season’s demand for this model will be normally distributed with mean of 200 and standard deviation of 125. Land’s End will sell those sunglasses for $100 each. Geoff ’s production cost is $25.
a. How much would Land’s End buy if they chose option 1?
b. How much would Land’s End buy if they chose option 2?
c. Which option will Land’s End choose?
d. Suppose Land’s End chooses option 1 and orders 275 units. What is Geoff Gullo’s expected profit?