Graphics Inc. makes novelty party supplies. They are trying to decide how many “March Madness 2016” shirts they should stock. They can purchase the shirts from their supplier for $5 each. They sell the shirts for $8 each at their store. The shirts are only worth selling in March of this year.
a. Using the newsvendor model, what probability of stock out should Graphics Inc. seek in their inventory decision?
b. Suppose Graphics Inc. thinks the demand will be between 1000 and 2000, with each number equally likely. How many should Graphics Inc. order?
c. Now, suppose that Graphics Inc. can sell any leftover shirts in April on clearance for $2. Will they order more or less shirts in that case? Why?