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.
This season’s demand for this model will be Normally distribution with mean 200 and standard
deviation 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? ) 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?
NorthEast Airways
A newly created NorthEast Airways (NE) flight from Philadelphia to Boston has 300 seats. The
high fare on the flight is $800 and the restricted/low fare is $300. There is ample demand for the
low fare class but high fare demand is random. Further, the customers who buy low fares buy
their tickets well in advance before high fare customers. Assume the demand for the high fare is
normally distributed with mean 120 and standard deviation of 50.
a. Mr. Wright is in charge of the flight booking operations and decides to set a protection level for the
high fare. What is the optimal protection level for the high fare?
b. Suppose a protection level of 150 is chosen. What is the total expected revenue?