Supply Contract:
For a make-to-stock situation, the manufacturer incurs a fixed production cost of $20,000 and a variable cost of $60 per unit. The salvage value is $15 per unit.The market department has given the following expected demand distribution for the product:
Demand Probability
5,000 0.25
6,000 0.20
7,000 0.20
8,000 0.25
9,000 0.10
The retailer pays the manufacturer $100 per units, and sells to his own customers at $150 per unit.
Q1. If the manufacturer produces 6,000 units before the season, what will be the expected profits for the manufacturer and retailer respectively?
Q2. From the manufacturer's perspective, what is the optimal production quantity? Show the corresponding expected profit for the firm to support your results.
Q3. Suppose that you are hired as a supply chain consultant to suggest an alternative (perhaps an inventive from the retailer to the manufacturer) so that the manufacturer increases his production quantity from 6,000 to a larger number of your choice so that the expected profits of both the manufacturer and the retailer increase. What would you suggest? You MUST calculate the expected profits of the manufacturer and the retailer for the new production quantity. Choose your contract and the corresponding parameter.