Question: Sportswear company O'yeah designs and sells wetsuits to the U.S. market. The designs of the wetsuits are updated each year. The process for updating the design typically starts in January the year before the designs are to be released. At this time, the purchasing, design, and sales departments have a two-day meeting to discuss the product portfolio for the upcoming year, including design, functionality, and price. In March, the designs are finalized, and the purchasing department starts negotiating with suppliers across the world.
Production usually starts in September or October the year before the designs are to be released, and lasts until December or January depending on the supplier. In February, retailers start placing their orders to O'yeah, with retail sales of the new designs typically starting in early April.
The season stretches from April to September. As the season progresses, retailers place replenishment orders to O'yeah, who supplies the retailers from a central warehouse. Sales peak in early summer. Towards the end of the summer, sales decline dramatically. When the season ends in September, O'yeah pushes out any remaining inventory to the retailers by offering all models at only 25% of the original selling price.
The policy suggested by the sales manager leads to a lower expected profit than the "optimal" policy calculated in Part 1. The sales manager motivates this by claiming that the policy in Part 1 is not taking into account future lost profits by being out of stock. "So", he argues, "the expected profit implied by the 'optimal policy' is biased upwards."
Suppose there is an additional cost per unit out-of-stock, ?. Suppose further that the policy suggested in Part 2 is the policy that maximizes expected contribution when this additional cost is taken into account.
What is the additional cost ?? Please round to closest integer dollars. Answer without the dollar symbol.