Question: The buyer for Needless Markup, a famous "high end" department store, must decide on the quantity of a high-priced woman's handbag to procure in Italy for the following Christmas season. The unit cost of the handbag to the store is $28.50 and the handbag will sell for $150.00. Any handbags not sold by the end of the season are purchased by a discount firm for $20.00. In addition, the store accountants estimate that there is a cost of $0.40 for each dollar tied up in inventory, as this dollar invested elsewhere could have yielded a gross profit. Assume that this cost is attached to unsold bags only.
a. Suppose that the sales of the bags are equally likely to be anywhere from 50 to 250 handbags during the season. Based on this, how many bags should the buyer purchase? (Hint: This means that the correct distribution of demand is uniform. You may solve this problem assuming either a discrete or a continuous uniform distribution.)
b. A detailed analysis of past data shows that the number of bags sold is better described by a normal distribution, with mean 150 and standard deviation 20. Now what is the optimal number of bags to be purchased?
c. The expected demand was the same in parts (a) and (b), but the optimal order quantities should have been different. What accounted for this difference?